Question

On February 1, a mortgagor makes a $638 payment on her mortgage, which is at the rate of 10%. The mortgagee allocates $500 to the payment of interest. What is the principal balance due on the mortgage on February 2? Select one:

a. $60,000
b. $38,400
c. $95,700
d. $59,862

Answer 1

The principal balance due on the mortgage on February 2 is d. $59,862.

Step-by-step explanation:

To determine the principal balance due on February 2, we subtract the interest payment from the total payment made by the mortgagor. If $500 is allocated to the payment of interest out of the $638 total payment, the remaining amount represents the reduction in the principal balance. Therefore, $638 - $500 = $138 goes towards reducing the principal balance. If we deduct this amount from the previous principal balance, we get $60,000 - $138 = $59,862. Thus, the correct answer is $59,862.

It's important to understand the components of a mortgage payment, where a portion goes towards paying off the interest accrued, and the remainder reduces the principal balance. In this scenario, knowing the interest portion allocated allows us to calculate the reduction in the principal balance, resulting in the correct figure of $59,862 on February 2.