A borrower wants the lowest total scheduled interest and can afford a higher payment. Comparing fixed-rate loans with the same amount and rate, which term generally best meets that goal?
Correct Answer
B) The shorter amortization term
Why this is correct: Total scheduled interest is minimized by repaying the principal as quickly as possible. A shorter amortization term (e.g., 15 years vs. 30 years) means higher monthly payments, but because the principal is reduced faster, less interest accrues over the life of the loan. Why the other choices are wrong: "The longest available term" is wrong; a longer term spreads payments out, resulting in more interest paid over time due to the principal being outstanding longer. "An interest-only term" is wrong; during an interest-only period, no principal is repaid, so total interest paid is higher for the same loan amount and rate. "A term with a balloon before amortization ends" is wrong; a balloon payment defers principal repayment, which typically increases total interest compared to a fully amortizing shorter-term loan. Exam tip: To minimize total interest: choose the shortest affordable term. Interest-only and balloon options keep principal higher for longer, increasing cost.
Why This Is the Correct Answer
Why this is correct: Total scheduled interest is minimized by repaying the principal as quickly as possible. A shorter amortization term (e.g., 15 years vs. 30 years) means higher monthly payments, but because the principal is reduced faster, less interest accrues over the life of the loan. Why the other choices are wrong: "The longest available term" is wrong; a longer term spreads payments out, resulting in more interest paid over time due to the principal being outstanding longer. "An interest-only term" is wrong; during an interest-only period, no principal is repaid, so total interest paid is higher for the same loan amount and rate. "A term with a balloon before amortization ends" is wrong; a balloon payment defers principal repayment, which typically increases total interest compared to a fully amortizing shorter-term loan. Exam tip: To minimize total interest: choose the shortest affordable term. Interest-only and balloon options keep principal higher for longer, increasing cost.
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