You just borrowed $900,000 using a 25 year home loan that's interest-only for the first 4 years, and principal and interest (P&I) for the remaining 21 years.The interest rate is 3.6% pa compounding monthly which is not expected to change.Which of the following statements is NOT correct?Question 5Select one:a.The effective monthly rate is 0.003 per month, given as a decimal. If the interest rate falls, the IO and P&I monthly payments will fall.b.If the IO term was one year shorter so the P&I term was one year longer, then the monthly payments over the P&I term would be lower.c.The IO loan's perpetuity factor is 333.333333, while the P&I loan's annuity factor is 176.642488.d.The IO loan payments will be $2,700 per month, rounded to the nearest cent.e.The P&I loan payments will be $4,554.02 per month, rounded to the nearest cent.
Question
You just borrowed 900,000 using a 25 year home loan that's interest-only for the first 4 years, and principal and interest (P&I) for the remaining 21 years.The interest rate is 3.6% pa compounding monthly which is not expected to change.Which of the following statements is NOT correct?Question 5Select one:a.The effective monthly rate is 0.003 per month, given as a decimal. If the interest rate falls, the IO and P&I monthly payments will fall.b.If the IO term was one year shorter so the P&I term was one year longer, then the monthly payments over the P&I term would be lower.c.The IO loan's perpetuity factor is 333.333333, while the P&I loan's annuity factor is 176.642488.d.The IO loan payments will be 2,700 per month, rounded to the nearest cent.e.The P&I loan payments will be $4,554.02 per month, rounded to the nearest cent.
Solution
The statement that is NOT correct is:
b. If the IO term was one year shorter so the P&I term was one year longer, then the monthly payments over the P&I term would be lower.
Explanation:
The interest-only (IO) period of a loan is the time during which only the interest is paid, and the principal remains unchanged. If this period is shortened, the principal and interest (P&I) period, during which both the principal and the interest are paid, becomes longer. This means that the principal will be spread out over a longer period of time, which would indeed lower the monthly payments. However, because the interest is only being paid on the principal and not on the interest accrued during the IO period, the total amount of interest paid over the life of the loan would be higher. Therefore, while the monthly payments during the P&I period would be lower, the total cost of the loan would be higher.
Similar Questions
You just borrowed $900,000 using a 25 year home loan that's interest-only for the first 4 years, and principal and interest (P&I) for the remaining 21 years.The interest rate is 3.6% pa compounding monthly which is not expected to change.Which of the following statements is NOT correct?Question 5Select one:a.The effective monthly rate is 0.003 per month, given as a decimal. If the interest rate falls, the IO and P&I monthly payments will fall.b.If the IO term was one year shorter so the P&I term was one year longer, then the monthly payments over the P&I term would be lower.c.The IO loan's perpetuity factor is 333.333333, while the P&I loan's annuity factor is 176.642488.d.The IO loan payments will be $2,700 per month, rounded to the nearest cent.e.The P&I loan payments will be $4,554.02 per month, rounded to the nearest cent.
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