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?
Correct Answer
A) $340,000
Using amortization calculations, the monthly payment would be approximately $2,000. After 5 years (60 payments), roughly $60,000 in principal would be paid down, leaving approximately $340,000. Early payments are primarily interest.
Why This Is the Correct Answer
Option A ($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.
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