A borrower has a $400,000 fixed-rate mortgage at 4% per year, compounded semi-annually, amortized over 25 years with monthly payments of about $2,104. About how much of the first monthly payment goes to principal?
Correct Answer
B) $782
The effective monthly rate is (1.02)^(1/6) − 1 = 0.3306%. First-month interest is $400,000 × 0.003306 = $1,322.36, and the payment is $2,104.08, so the principal portion is $2,104.08 − $1,322.36 = $781.72, about $782.
Why This Is the Correct Answer
Payment $2,104.08 minus first-month interest $1,322.36 (400,000 × 0.3306%) leaves $781.72 for principal, which rounds to $782.
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A borrower has a $400,000 mortgage at 5% annual interest, amortized over 25 years. If they make an additional principal payment of $10,000, what is the primary benefit?