A borrower chooses between two otherwise identical 30-year fixed-rate loans: one at 6.0% and one at 6.5%. Which loan generally has the lower scheduled principal-and-interest payment?
Correct Answer
A) The 6.0% loan
Why this is correct: For a fixed-rate, fully amortizing loan, the monthly principal-and-interest payment is determined by the loan amount, term, and interest rate. Holding the loan amount and term constant, a lower interest rate results in a lower payment because less interest is charged each period. Why the other choices are wrong: 'The 6.5% loan' is wrong because a higher interest rate increases the payment, all else being equal. 'They must have the same payment' is wrong because the interest rate difference directly changes the payment calculation. 'The answer depends only on property taxes' is wrong; while taxes affect the total housing payment, the question specifically asks about the 'principal-and-interest payment,' which is determined by loan terms, not taxes. Exam tip: In a comparison of otherwise identical loans, the one with the lower interest rate always has the lower principal-and-interest payment.
Why This Is the Correct Answer
Why this is correct: For a fixed-rate, fully amortizing loan, the monthly principal-and-interest payment is determined by the loan amount, term, and interest rate. Holding the loan amount and term constant, a lower interest rate results in a lower payment because less interest is charged each period. Why the other choices are wrong: 'The 6.5% loan' is wrong because a higher interest rate increases the payment, all else being equal. 'They must have the same payment' is wrong because the interest rate difference directly changes the payment calculation. 'The answer depends only on property taxes' is wrong; while taxes affect the total housing payment, the question specifically asks about the 'principal-and-interest payment,' which is determined by loan terms, not taxes. Exam tip: In a comparison of otherwise identical loans, the one with the lower interest rate always has the lower principal-and-interest payment.
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