Question

Why does it take 30 years to pay off $150,000 loan, even though you pay $1000 a month?
a.
Sales tax is really high for home mortgages, and that is why monthly payments are much higher than just paying off principal.
b.
Banks trick investors into paying more money monthly so they can pocket the rest.
c.
Most home owners are expected to miss about half of their payments, so banks take this into account when determining the term of the loan.
d.
Even though the principal would be paid off in just over 10 years, it costs the bank a lot of money to fund the loan. The rest of the loan is paid out in interest

Answer 1

Correct answer: d.

Explanation (brief):
- A mortgage payment covers interest plus a bit of principal. Interest is charged on the remaining loan balance, so early payments are mostly interest and only slowly reduce principal.
- If you simply divided $150,000 by $1,000 you’d get 150 months (12.5 years) — that ignores interest.
- For example, a 30-year mortgage where you pay $1,000/month on $150,000 implies an interest rate of roughly 7% APR. First-month interest ≈ 150,000*(0.07/12) ≈ $875, so only about $125 of that $1,000 reduces principal. Over 30 years you’d pay about $360,000 total, roughly $210,000 of which is interest.
- (Options a–c are incorrect: sales tax isn’t why payments are higher, banks aren’t “tricking” you in that way, and lenders don’t set terms assuming half the borrowers miss payments.)

If you want, I can compute the exact interest rate for a given payment or show a full amortization schedule.