If a borrower makes an additional principal payment of $5,000 in the first year of a 30-year fixed-rate mortgage, what is the primary benefit?
Correct Answer
C) Future interest charges will be reduced because the principal balance is lower
Additional principal payments reduce the outstanding loan balance, which means less interest is calculated on future payments since interest is charged on the remaining principal. The monthly payment amount and interest rate remain the same, but more of each future payment goes toward principal, and the loan will be paid off earlier.
Why This Is the Correct Answer
Additional principal payments reduce the outstanding loan balance, which means less interest is calculated on future payments since interest is charged on the remaining principal. The monthly payment amount and interest rate remain the same, but more of each future payment goes toward principal, and the loan will be paid off earlier.
More Mortgage Knowledge Questions
A borrower is comparing two loan offers: Loan A has no points and 4.5% interest rate, Loan B has 2 points and 4.0% interest rate. The loan amount is $400,000. How much will the borrower pay upfront for the points on Loan B?
A lender charges a 1% origination fee on all loans. For a borrower obtaining a $250,000 mortgage, what is the maximum origination fee that can be charged without violating the points and fees test under the ATR/QM rule for a first-lien mortgage?
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A borrower is considering paying discount points to reduce their interest rate. Each point costs 1% of the loan amount and reduces the rate by 0.25%. On a $300,000 loan, how much would the borrower pay for 2 discount points?
A borrower asks about the difference between discount points and origination fees. What is the most accurate explanation?
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