Question

1. Lamar is looking to refinance his mortgage. His current loan has 120 monthly payments of $1,350 remaining. His new mortgage will require 180 monthly payments of $900. Assuming a principal value of $162,000 for both loans, what do you know about the interest rate of the current mortgage compared to the new mortgage?

- Current interest rate = New interest rate

- Current interest rate < New interest rate

- Current interest rate > New interest rate

2. Lamar is looking to refinance his mortgage. He has already locked-in a new mortgage payment of $1,522 for the next 360 months, and closes on the new mortgage next week. Prior to closing Lamar's bank announces that interest rates are increasing. Should Lamar try to get out of the new mortgage that he had locked-in, and refinance at the new higher interest rate? Why should he make that decision?

- Yes, the new higher interest rate would provide Lamar with additional income

- Yes, the new higher interest rate would provide more savings for Lamar

- No, the new higher interest rate would provide Lamar with less income

- No, the higher interest rate would be a more expensive loan for Lamar

Answer 1

1. Since the principal value is same for both and the loan period of new is 1.5 times the old but the payments of old are 1.5 times the new, hence the new rate will be higher than the old. This is because the repayments don't have that much impact on present value than the duration of payments. Option B is correct.

2. Option D is correct. The interest rate is the interest that Lamar will have to pay on his loan. Hence, an increasing interest rate means he will have to pay more and it will be disadvantageous for him.