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
B) 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.
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