Finance
A Connecticut borrower receives a 30-year amortizing mortgage at 7% and makes extra principal payments each month. The effect is:
ANo effect—extra payments are not applied to principal
BThe loan is paid off sooner and total interest paid is reduced✓ Correct
CThe interest rate is lowered
DThe monthly payment amount increases
Explanation
Extra principal payments directly reduce the outstanding balance, causing the loan to amortize faster, shorten the payoff timeline, and significantly reduce total interest paid over the life of the loan.
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Key Terms to Know
Amortization
The gradual repayment of a loan through scheduled periodic payments that cover both principal and interest.
Discount PointsPrepaid interest paid to a lender at closing to reduce the mortgage interest rate, with each point equal to 1% of the loan amount.
Adjustable-Rate Mortgage (ARM)A mortgage with an interest rate that changes periodically based on a financial index, usually after an initial fixed-rate period.
Loan-to-Value Ratio (LTV)The ratio of a mortgage loan amount to the appraised value or purchase price of a property, expressed as a percentage.
Math Concepts
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