Georgia Assessments for the Certification of Educators GACE Practice Test

A homeowner is attempting to choose between several mortgage loans for a $200,000 home. Which of the following would have the lowest monthly payment?

1. A 15-year fixed rate mortgage at 7%

2. A 15-year fixed rate mortgage at 12%

3. A 30-year fixed rate mortgage at 12%

4. A 30-year fixed rate mortgage at 6%

The correct answer is: A 30-year fixed rate mortgage at 6%

The option of a 30-year fixed rate mortgage at 6% would indeed result in the lowest monthly payment for the homeowner. This is primarily due to two factors: the lower interest rate and the longer loan term compared to the other options. A 30-year mortgage spreads the total cost of the loan over a longer period, which significantly lowers the monthly payment even at the 6% interest rate. The lower interest rate also contributes to reducing the overall cost of borrowing. In contrast, shorter loan terms, such as the 15-year mortgages, typically result in higher monthly payments due to being paid off in a shorter time frame, even if the interest rates are higher. Therefore, the combination of a longer duration and a lower rate makes the 30-year mortgage at 6% the most affordable option for the homeowner.