Humber/Ontario Real Estate Course 4 Exam Practice

What is the best way for a mortgagor to lower monthly payments on an amortized loan?

1. Shorten the term of the mortgage.

2. Extend the amortization period from 15 to 25 years.

3. Negotiate a cash back feature on the mortgage.

4. Secure a mortgage with a principal prepayment feature.

5. Obtain a mortgage at a lower fixed interest rate.

6. Choose bi-weekly payment installments instead of monthly.

The correct answer is: Extend the amortization period from 15 to 25 years.

To lower monthly payments on an amortized loan, extending the amortization period is a highly effective approach. When a mortgagor increases the duration over which the loan is repaid, the monthly payment amount decreases because the total loan amount is spread over a longer period. This separation of principal and interest payments allows for a more manageable monthly financial obligation, which can be particularly beneficial for borrowers striving to reduce their short-term financial burden. While other options may offer some benefits, such as negotiating lower interest rates or different payment schedules, they do not directly address the need to decrease the specific amount paid each month as effectively as extending the amortization period does. For instance, shortening the loan term would actually increase monthly payments due to the need to repay the loan in less time. Although choosing bi-weekly payments could theoretically lead to less total interest paid over the life of the loan, it would not lower the monthly payment amount. Therefore, extending the amortization period stands out as the best strategy for achieving lower monthly payments.