Certified Residential Appraiser Practice Exam

When interest rates drop on a mortgage loan, what typically occurs with monthly payments?

1. Payments increase

2. Payments drop

3. Payments stay the same

4. Payments become more volatile

The correct answer is: Payments drop

When interest rates drop on a mortgage loan, monthly payments typically decrease. This occurs because the interest rate is a significant component of the total cost of the loan. When borrowers secure a loan at a lower interest rate, the amount of interest they pay each month is reduced, leading to lower monthly payment obligations. A mortgage payment consists primarily of principal and interest. When the interest rate is lower, a larger portion of the monthly payment can go towards paying down the principal balance, thereby reducing the total amount paid each month. Lower rates can also enable borrowers to refinance existing loans, further reducing their monthly payments. In general, a drop in interest rates can make it more affordable for homeowners to borrow, which can lead to increased home purchasing activity as well, since prospective buyers are incentivized by the reduced cost of borrowing.