A homeowner has $200 000 home with a 20-year mortgage, paid monthly at 7.25% APR. 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?

Question

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Firstly, we need to calculate the remaining balance on the mortgage after 5 years of payments. Using a mortgage calculator, we find that the remaining balance is approximately $154 441.

Next, we need to calculate the new monthly payment with the extra $50 000 paid as a lump sum. Again, using a mortgage calculator, we find that the new monthly payment would be approximately $896.

Now, we can calculate the time it would take to pay off the mortgage with this new monthly payment. We find that it would take approximately 13 years and 9 months.

Comparing this to the original 15-year timeframe (20-year mortgage minus the 5 years already paid), we can see that it would reduce the time it takes to pay off the mortgage by approximately 1 year and 3 months. Therefore, the answer is C) 6 years (rounded up from 1.25 years).

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