Question

The Johnsons are buying a house that costs $210,000 and can afford a 20% down payment. If the Johnsons want the lowest monthly payment, which loan option would you recommend? a. 30 year FHA, 3.5% down at a fixed rate of 6.25% b. 30 year fixed, 20% down at a fixed rate of 6% c. 30 year fixed, 10% down at a fixed rate of 6% d. 15 year fixed, 20% down at a fixed rate 5.5%

Answer 1

Compute each loan's monthly payment M = P * (r / (1 - (1+r)^-n)), where r = monthly rate and n = months.

Price = $210,000.

a) 30-yr FHA, 3.5% down → down = $7,350, P = $202,650, rate = 6.25% → r = 0.0625/12, n = 360
M ≈ $1,247

b) 30-yr fixed, 20% down → down = $42,000, P = $168,000, rate = 6.00% → r = 0.06/12, n = 360
M ≈ $1,007

c) 30-yr fixed, 10% down → down = $21,000, P = $189,000, rate = 6.00% → r = 0.06/12, n = 360
M ≈ $1,133

d) 15-yr fixed, 20% down → down = $42,000, P = $168,000, rate = 5.50% → r = 0.055/12, n = 180
M ≈ $1,373

The lowest monthly payment is option b (30-year fixed, 20% down at 6%). (Also note that with 20% down you avoid PMI, which further supports option b.)