Which of the following statements regarding a 20-year (240-month) $225,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.)
A) The outstanding balance declines at a slower rate in the later years of the loan's life.
B) The remaining balance after three years will be $225,000 less one third of the interest paid during the first three years.
C) Because it is a fixed-rate mortgage, the monthly loan payments (which include both interest and principal payments) are constant.
D) Interest payments on the mortgage will increase steadily over time, but the total amount of each payment will remain constant.
E) The proportion of the monthly payment that goes towards repayment of principal will be lower 10 years from now than it will be the first year.

Question

Quizplus · Accepted Answer

Because it is a fixed-rate mortgage, the monthly loan payments (which include both interest and principal payments) are constant. This means that the same amount will be paid each month for the duration of the loan, although the proportion of the payment that goes towards interest and principal may change. None of the other statements are true regarding a fixed-rate mortgage. The outstanding balance should decline at a consistent rate throughout the life of the loan, the remaining balance after three years cannot be determined without specific information about the interest rate and payments made, interest payments and total payments should remain constant over time, and the proportion of the monthly payment that goes towards repayment of principal should increase over time as the outstanding balance declines.

Which of the Following Statements Regarding a 20-Year (240-Month) $225,000