A borrower has a $400,000 mortgage with a 25-year amortization at 3.5% (compounded semi-annually). After making payments for 5 years, approximately how much principal will remain?

Q: What is the correct answer to: A borrower has a $400,000 mortgage with a 25-year amortization at 3.5% (compounded semi-annually). After making payments for 5 years, approximately how much principal will remain?

The correct answer is $340,000. Option B ($340,000) is correct because mortgage amortization follows a predictable pattern where early payments are predominantly interest. With a $400,000 mortgage at 3.5% over 25 years, the monthly payment is approximately $2,000. After 60 payments (5 years), roughly $60,000 in principal has been paid down ($400,000 - $60,000 = $340,000 remaining). This reflects the standard amortization principle where interest comprises the majority of early payments, gradually shifting toward principal over time.

Q: What background knowledge is needed for this Mortgage & Real Estate Finance question?

Mortgage amortization is the process of paying down a loan through regular payments over a specified period. In Canada, mortgages are typically compounded semi-annually, affecting the effective interest rate. The amortization schedule shows how each payment is split between principal and interest. Early payments are heavily weighted toward interest because interest is calculated on the outstanding principal balance. As principal decreases over time, more of each payment goes toward principal reduction. Real estate professionals must understand this concept to help clients make informed decisions about mortgage terms, prepayment options, and refinancing strategies. This knowledge is essential for accurate financial counseling.

Q: What is a good way to remember the answer to this Mortgage & Real Estate Finance question?

Think of mortgage payments like eating an ice cream cone - you start with mostly ice cream (interest) at the top and gradually work down to more cone (principal) at the bottom. In the first 5 years, you're still mostly eating ice cream, so principal reduction is minimal. When you see amortization questions, visualize the ice cream cone. Early years = mostly interest (ice cream), later years = mostly principal (cone). This helps you remember that principal reduction starts slowly and accelerates over time.

Q: What exam tip applies to this Mortgage & Real Estate Finance question?

For amortization questions, remember the 'early interest rule' - in the first third of the amortization period, expect minimal principal reduction. Quick estimate: divide the original principal by 6-8 for 5-year reduction.

Q: How does this Mortgage & Real Estate Finance concept apply in real world practice?

A real estate agent is working with first-time homebuyers who want to understand their equity building potential. The clients are considering a $400,000 mortgage and ask how much equity they'll have after 5 years. The agent explains that with a 25-year amortization at 3.5%, they'll have paid down only about $60,000 in principal, leaving $340,000 owing. This helps the clients understand that early homeownership builds equity slowly through principal reduction, making property appreciation and additional payments important for equity growth.

Question

Mortgage & Real Estate FinanceAmortization CalculationsHARD

A borrower has a $400,000 mortgage with a 25-year amortization at 3.5% (compounded semi-annually). After making payments for 5 years, approximately how much principal will remain?

Answer Options

A

$320,000

B

$340,000

C

$360,000

D

$380,000