39. At any particular time, home mortgage rates are determined by market forces, and individual borrowers can’t do much about them. The length of time required to pay off a mortgage loan, however, varies a great deal with the size of the monthly payment made, which is under the borrower’s control.

You’re a junior loan officer for a large metropolitan bank. The head of the mortgage department is concerned that customers don’t fully appreciate that a relatively small increase in the size of mortgage payments can make a big difference in how long the payments have to be made. She feels homeowners may be passing up an opportunity to make their lives better in the long run by not choosing shorter-term mortgages that they can readily afford.

To explain the phenomenon to customers, she’s asked you to put together a chart that displays the variation in payment size with term at typical interest rates. The starting point for the chart should be the term for a typical 30-year

(360-month) loan. Use the TIMEVAL program to construct the following chart.

Write a paragraph using the chart to explain the point. What happens to the effect as interest rates rise? Why?

Transcribed Image Text:

Mortgage Payments per $100,000 Borrowed as Term Decreases Mortgage Term in Years 30 6% 8% Rates 10% 12% 25 20 15