A borrower is comparing a $300,000 loan at 6.5% over 15 years against the same amount and rate over 30 years, and asks what changes.
Correct Answer
A) The 15-year payment is higher and its total interest is lower
A shorter term repays the same principal in fewer installments, so each payment is larger, and the balance falls faster, so less interest accrues over the life of the loan. Other choices: a lower payment on a shorter term is arithmetically impossible at the same rate and amount; higher payments that also produce more interest would mean the extra money went nowhere; and 30 years at the same rate accrues more interest, not less, which is the whole tradeoff. Source: Loan term and amortization
Why This Is the Correct Answer
A shorter term repays the same principal in fewer installments, so each payment is larger, and the balance falls faster, so less interest accrues over the life of the loan. Other choices: a lower payment on a shorter term is arithmetically impossible at the same rate and amount; higher payments that also produce more interest would mean the extra money went nowhere; and 30 years at the same rate accrues more interest, not less, which is the whole tradeoff. Source: Loan term and amortization
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