Explanation:
Banks charge higher interest rates to compensate for higher credit risk. Let's analyze each option:
A. High FICO score: A high FICO score indicates good credit history and lower default risk, so banks would charge a lower interest rate, not higher.
B. High loan-to-value ratio: This means the borrower has less equity in the property. If property values decline, the loan could become underwater (loan balance > property value), increasing default risk. Therefore, banks charge higher interest rates to compensate for this risk.
C. Low debt-to-assets ratio: This indicates strong financial position with more assets relative to debt, suggesting lower default risk. Banks would charge a lower interest rate.
D. Low debt-to-income ratio: This shows the borrower has sufficient income to service debt payments, indicating lower default risk. Banks would charge a lower interest rate.
Therefore, a high loan-to-value ratio represents higher risk to the lender, justifying a higher interest rate.
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In assessing the key variables associated with a potential mortgage loan, a bank will charge a higher interest rate if the borrower has a relatively:
A
High FICO score.
B
High loan-to-value ratio.
C
Low debt-to-assets ratio.
D
Low debt-to-income ratio.