Florida Real Estate Sales Associate Examination Content OutlineReal Estate FinanceHard
A borrower is evaluating a 15-year mortgage versus a 30-year mortgage for the same loan amount and interest rate. Which of the following statements accurately describes the primary financial benefit of choosing the 15-year mortgage?
- ALower monthly principal and interest payments.
- BGreater flexibility for refinancing in the future.
- CA higher total interest paid over the life of the loan.
- DFaster accumulation of equity in the property.
Show answer & explanationAnswer & explanation
Correct answer: D. Faster accumulation of equity in the property.
A 15-year mortgage has a shorter amortization period, meaning a larger portion of each monthly payment goes towards principal reduction from the start. This results in significantly faster equity accumulation compared to a 30-year mortgage, where interest makes up a larger portion of early payments.
Why the other options are wrong
- A. 15-year mortgages typically have higher monthly payments because the principal is paid off over a shorter period.
- B. Refinancing flexibility is not a primary, direct financial benefit distinguishing a 15-year from a 30-year mortgage.
- C. 15-year mortgages result in significantly less total interest paid over the life of the loan due to the shorter term.
15-Year vs. 30-Year Mortgage
Comparison of two common mortgage terms, where a 15-year mortgage pays off the loan in half the time of a 30-year mortgage, impacting monthly payments, total interest paid, and equity accumulation.
- 15-year: Higher monthly payments, lower total interest, faster equity
- 30-year: Lower monthly payments, higher total interest, slower equity
- Interest rates for 15-year are often slightly lower
- Choice depends on borrower's financial goals and comfort with monthly payments
Memory trick: Short Term Loans: 'Swift Equity' and less interest.