Humber/Ontario Real Estate Course 3 Exam Practice

What is the most effective way for a mortgagor to reduce monthly payments on an amortized mortgage?

1. Reduce the mortgage term.

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

3. Arrange a cash back when negotiating the mortgage.

4. Arrange a mortgage with a principal prepayment privilege.

5. Refinance the mortgage at a higher interest rate.

6. Convert to a variable-rate mortgage.

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

Increasing the amortization period from 15 years to 25 years is an effective way for a mortgagor to reduce monthly payments on an amortized mortgage. This approach spreads the total loan amount over a longer timeframe, resulting in lower monthly payment amounts due to the reduced principal that needs to be paid each month. Longer amortization periods result in smaller monthly payments, making it more manageable for borrowers to meet their financial obligations, albeit at the cost of paying more interest over the life of the loan. Borrowers should carefully consider this option, along with the trade-off of overall interest costs, but it is a strategy often employed to achieve lower monthly expenses. Other strategies may not lead to as effective a reduction in monthly payments as simply extending the amortization period. For instance, reducing the mortgage term generally leads to higher monthly payments, while options like arranging a cash back or a principal prepayment privilege may not directly affect the monthly payment structure as significantly. Similarly, refinancing at a higher interest rate would likely increase payments instead of decreasing them.