Which of the following statements regarding a 15-year (180-month) $225,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.)
A) The outstanding balance declines at a faster rate in the later years of the loan's life.
B) The remaining balance after three years will be $125,000 less one third of the interest paid during the first three years.
C) Because the outstanding balance declines over time, the monthly payments will also decline over time.
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

In a fixed-rate mortgage, the monthly payments remain the same but the proportion of the payment that goes towards interest and repayment of principal changes over time. In the early years of the mortgage, a larger portion of the payment goes towards interest and a smaller portion goes towards repayment of principal. As the outstanding balance declines over time, more of the payment goes towards repayment of principal, causing the outstanding balance to decline at a faster rate in the later years of the loan's life.

Which of the Following Statements Regarding a 15-Year (180-Month) $225,000