Question: You borrow $500,000 to purchase a house. The mortgage is a 30-year fixed rate mortgage, with monthly payments.

1. Assume that you have good credit, and can borrow money at a 3.75% annual interest rate. What will your monthly payment be?
2. Now, assume that you have lousy credit, and must pay a 6.5% annual interest rate to obtain a mortgage. What will your monthly payment be?
3. Having lousy credit can be costly. How much additional interest will you pay over the 30-year period if you have bad credit, relative to what you would pay if you have good credit? (Hint: Calculate the total interest over the 30-year period on the loan in Part A, and the total interest over the 30-year period for the loan in Part D. What is the difference between the two amounts?).
4. Explain why it is not necessarily unethical for banks to charge people with poor credit histories higher interest rates (within reason, of course)?

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