Which mortgage option would have the lowest monthly payment for a $200,000 home?

Which mortgage option would have the lowest monthly payment for a $200,000 home?

• A. A 15-year fixed rate mortgage at 7%
• B. A 30-year fixed rate mortgage at 6%
• C. A 15-year fixed rate mortgage at 12%
• D. A 30-year fixed rate mortgage at 12%

Answer: (B)

The main idea is that monthly mortgage payments come from three factors: loan amount, interest rate, and how long you’ll repay. Extending the term lowers the monthly payment because you’re spreading the same loan over more months, but it means more interest paid over time. Lowering the rate also reduces the monthly payment, but its effect can be offset by a shorter term. For a $200,000 loan, a 30-year fixed at about 6% yields a monthly payment around $1,200. A 15-year fixed at 7% is significantly higher, roughly around $1,800 per month, because you’re paying off the loan much faster. A 15-year at 12% climbs even more, near $2,400 monthly. A 30-year at 12% is also high, about $2,000 per month, due to the high rate despite the longer term. So the option with the lowest monthly payment is the 30-year fixed mortgage at 6%, since the longer term dominates the payment size even with a moderate rate.

The main idea is that monthly mortgage payments come from three factors: loan amount, interest rate, and how long you’ll repay. Extending the term lowers the monthly payment because you’re spreading the same loan over more months, but it means more interest paid over time. Lowering the rate also reduces the monthly payment, but its effect can be offset by a shorter term.

For a $200,000 loan, a 30-year fixed at about 6% yields a monthly payment around $1,200. A 15-year fixed at 7% is significantly higher, roughly around $1,800 per month, because you’re paying off the loan much faster. A 15-year at 12% climbs even more, near $2,400 monthly. A 30-year at 12% is also high, about $2,000 per month, due to the high rate despite the longer term.

So the option with the lowest monthly payment is the 30-year fixed mortgage at 6%, since the longer term dominates the payment size even with a moderate rate.