3 borrowers qualify for the mortgage rates of 3.5% on a 15-year and 6.0% on a 30
ID: 2787368 • Letter: 3
Question
3 borrowers qualify for the mortgage rates of 3.5% on a 15-year and 6.0% on a 30-year. Suppose that they can all make the payments on the loan that has higher payments. They are each buying a house for $150,000, but each of them has a different opportunity cost of capital. Based on each opportunity cost give your recommendation for the length of the mortgage.
a. Will has an outstanding credit card balance that has an interest rate of 28.99%
b. James has no outstanding debt and invests all her money in a money market account that averages a return of 0.85%
c. Chris has an investment account in equities. He has an average return of 17.5%
Explanation / Answer
As both Will and Chris has high opportunity cost, they will prefer short term loan i.e, 15 year loan
And as James is having low opportunity cost, James will prefer long term loan i.e., 30 year loan
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