A couple earning $4,840 per month wishes to have a mortgage payment no more than 25% of their earnings. Which interest rate and term will give them a payment closest to their target?

A couple earning $4,840 per month wishes to have a mortgage payment no more than 25% of their earnings. Which interest rate and term will give them a payment closest to their target?

• A. 5% over 15 years
• B. 5.75% over 30 years
• C. 6.25% over 20 years
• D. 7% over 30 years

Answer: (C)

To determine which interest rate and term will result in a mortgage payment closest to the couple's budget of 25% of their earnings, we first need to calculate that payment limit. With a monthly income of $4,840, 25% of their earnings is $1,210. Next, we analyze the potential mortgage payments for each choice using a mortgage payment formula or calculator, which considers the loan amount, interest rate, and loan term. The correct answer provides an interest rate of 6.25% over a term of 20 years. This option likely results in a payment that closely aligns with their target of $1,210. Shorter loan terms typically result in higher monthly payments for the same loan amount compared to longer terms, but they also mean less interest paid over the life of the loan. Therefore, the 20-year term at this interest rate strikes a balance between payment size and total interest paid. Different options such as the 5.75% over 30 years may result in a lower monthly payment due to the longer term, but can lead to paying significantly more interest overall and might not closely match the $1,210 target. Similarly, the 5% over 15 years would likely push the payment

To determine which interest rate and term will result in a mortgage payment closest to the couple's budget of 25% of their earnings, we first need to calculate that payment limit. With a monthly income of $4,840, 25% of their earnings is $1,210.

Next, we analyze the potential mortgage payments for each choice using a mortgage payment formula or calculator, which considers the loan amount, interest rate, and loan term.

The correct answer provides an interest rate of 6.25% over a term of 20 years. This option likely results in a payment that closely aligns with their target of $1,210. Shorter loan terms typically result in higher monthly payments for the same loan amount compared to longer terms, but they also mean less interest paid over the life of the loan. Therefore, the 20-year term at this interest rate strikes a balance between payment size and total interest paid.

Different options such as the 5.75% over 30 years may result in a lower monthly payment due to the longer term, but can lead to paying significantly more interest overall and might not closely match the $1,210 target. Similarly, the 5% over 15 years would likely push the payment