Michael is refinancing his home in Albany, New York. His current mortgage has a 6% annual interest rate, and he's considering a new loan at 4.5% annual interest rate. When comparing the monthly interest portions of these loans, what is the relationship between the annual rates and monthly calculations?
Correct Answer
B) The annual rate must be divided by 12 to determine the monthly interest rate
In mortgage interest calculations, the annual interest rate must be divided by 12 to determine the monthly interest rate used in payment calculations. For example, a 6% annual rate becomes 0.5% per month (6% ÷ 12 = 0.5%), which is then applied to the outstanding principal balance each month.
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Related Topics & Key Terms
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Related Concepts
An adjustable-rate mortgage (ARM) has an interest rate that changes periodically based on market conditions, typically after an initial fixed-rate period. The rate adjustment is tied to a financial index plus a margin.
Closing costs are the fees and expenses paid by the buyer and seller at the closing of a real estate transaction, beyond the purchase price. They typically range from 2-5% of the purchase price.
A conventional loan is a mortgage that is not insured or guaranteed by a government agency such as the FHA, VA, or USDA. It is originated and funded by private lenders and may be conforming or non-conforming.
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