Question

In the video’s amortization example, the borrower makes a $711 payment, where $375 goes toward paying interest and $336 goes toward paying the principal. Should the borrower be worried that they’ll never pay off the mortgage? Why or why not?

Answer 1

The borrower of a mortgage structured with an amortization schedule should not worry about not being able to pay off the loan because the payments are calculated to bring the balance to zero over the loan term. In the beginning, payments mainly cover interest, but over time, as the principal is paid down, a larger portion of the payment will go toward the principal.

Step-by-step explanation:

The borrower in the given amortization example should not be worried that they'll never pay off the mortgage as long as they continue to make the regular payments as scheduled. This is because mortgages are typically structured with an amortization schedule that ensures the loan balance is paid down over time. Initially, payments are mostly made up of interest; however, as the principal balance decreases, less interest accrues and more of each payment goes toward paying down the principal.

In this scenario, the borrower pays $711 each month, with early payments primarily composed of interest charges. As time passes, the proportion of the payment that covers interest will decrease and the portion that goes towards principal will increase, known as an amortization schedule. This schedule is intentional and designed to eventually reduce the loan balance to zero over the term of the loan, typically 30 years for mortgages.

Even if a significant portion of the early payments goes to interest, this does not mean the borrower won't pay off the mortgage. With continued, timely payments, the loan balance will decrease and they will ultimately own the home outright after the repayment term.

Answer 2

The borrower should not be worried as amortization schedules ensure that the loan is paid off by the end of the term, despite early payments being interest-heavy. Over time, payments shift towards more principal reduction, leading to full repayment.

Step-by-step explanation:

In the scenario where a borrower makes a \$711 payment on a mortgage with \$375 going towards interest and \$336 towards the principal, there should be no worry that the mortgage won't be paid off as long as payments continue as scheduled. Amortization schedules are designed so that even though early payments consist of more interest than principal, over time, the proportion of interest decreases and the proportion of principal repayment increases. This ensures that the loan is fully paid off by the end of the term.

The significant portion of interest paid at the beginning of a mortgage term is typical, primarily because the outstanding principal is at its highest. As the principal lowers with each payment, so does the interest portion of each payment, which means more of the payment goes towards reducing the principal. This is known as the amortization process.