A homeowner has a $200,000 home with a 20-year mortgage,paid monthly at a quoted APR of 7.25%.After five years he receives $50,000 as an inheritance.If he pays this $50,000 toward his mortgage along with his regular payment,by approximately how many years will it reduce the amount of time it takes him to pay off his mortgage?

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Quizplus · Accepted Answer

Paying a large lump sum early in the mortgage term significantly reduces the principal, which in turn reduces the amount of interest paid over the life of the loan. This allows the homeowner to pay off the mortgage much faster. In this case, a $50,000 payment after 5 years on a 20-year mortgage at 7.25% APR would approximately reduce the mortgage term by 6 years, due to the reduction in compounded interest over time.

A Homeowner Has a $200,000 Home with a 20-Year Mortgage,paid