Real Estate Math
A borrower makes an extra $500 principal payment each month on a $250,000 mortgage. Approximately how many years of payments might this save? (Assume a standard 30-year term is shortened significantly by extra principal)
AAbout 2-3 years
BAbout 5-7 years✓ Correct
CAbout 10-12 years
DIt makes no difference to the loan term
Explanation
Making extra principal payments on a 30-year mortgage can significantly reduce the loan term. $500 extra monthly on a $250,000 loan (at around 5-7% interest) typically saves approximately 5-7 years of payments, depending on the interest rate.
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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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