A borrower has a $300,000 mortgage at 5% annual interest rate with a 30-year term. After making payments for 10 years, approximately how much of the original principal balance remains?
Correct Answer
A) $240,000
In the early years of a 30-year mortgage, payments consist primarily of interest with relatively small principal reductions. After 10 years of a 30-year mortgage, approximately 20% of the original principal has been paid down, leaving about 80% or $240,000. This illustrates the front-loaded interest structure of amortizing mortgages.
Why This Is the Correct Answer
In the early years of a 30-year mortgage, payments consist primarily of interest with relatively small principal reductions. After 10 years of a 30-year mortgage, approximately 20% of the original principal has been paid down, leaving about 80% or $240,000. This illustrates the front-loaded interest structure of amortizing mortgages.
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