A borrower makes an extra $200 principal payment with their regular payment in month 15 of a 30-year fixed-rate mortgage. What is the primary effect on the remaining loan term?
Correct Answer
D) The loan term is reduced by more than one month
When an extra principal payment is made early in the loan term, it reduces the outstanding principal balance, which means all subsequent interest calculations are based on a lower balance. This creates a compounding effect that shortens the loan term by more than the equivalent of one regular payment, especially when made early in the amortization schedule.
Why This Is the Correct Answer
When an extra principal payment is made early in the loan term, it reduces the outstanding principal balance, which means all subsequent interest calculations are based on a lower balance. This creates a compounding effect that shortens the loan term by more than the equivalent of one regular payment, especially when made early in the amortization schedule.
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