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Determining the fixed-rate mortgage

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In questions in Part 2, you will consider buying a house in Urbanxx, IL as well as how to fund this purchase using a mortgage. To answer this question, please consider Exhibit A below. You may also download a copy of all exhibits used for this exam here (REFERNCE FILE Attached):

Please use this information to answer Questions 14 through 16. Suppose that you want to buy the house with a fixed-rate mortgage. Your local banker provides you with the following information about today's interest rates:

  • 30-year fixed-rate mortgage interest rate: 3.75%
  • Monthly payment (excluding taxes) on 30-year fixer: $1,334
  • 15-year fixed-rate mortgage interest rate: 2.50%
  • Monthly payment (excluding taxes) on 15-year fixer: $1,920

Q14: The interest rate on the 15-year fixed-rate mortgage is 125 basis points lower than the rate on the 15-year product. Give one reason this may be the case.

Q15: The monthly payment on the 15-year fixed-rate mortgage is higher than the payment on the 30-year product. Give one reason this may be the case.

Q16: Suppose that you decide to purchase this home with the 30-year fixed-rate mortgage. Six years from today, market interest rates increase by 2 percentage points. Will your monthly payment increase at that point? [ Multiplue choice, choose one below]

[ ] Yes, payment will increase.

[ ] No, payment will stay the same.

[ ] No, payment will decrease.

[ ] Impossible to predict as of the current time.

Reference no: EM133122841

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