Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 8% is CORRECT?
A) Exactly 8% of the first monthly payment represents interest.
B) The monthly payments will decline over time.
C) A smaller proportion of the last monthly payment will be interest, and a larger proportion will be principal, than for the first monthly payment.
D) The total dollar amount of principal being paid off each month gets smaller as the loan approaches maturity.
E) The amount representing interest in the first payment would be higher if the nominal interest rate were 6% rather than 8%.

Question

Quizplus · Accepted Answer

As the mortgage is amortized, a larger portion of each monthly payment goes towards principal and a smaller portion towards interest over time. Therefore, a smaller proportion of the last monthly payment will be interest, and a larger proportion will be principal, than for the first monthly payment. Option A is incorrect as the interest portion of the first monthly payment would be calculated using the nominal interest rate of 8%. Option B is incorrect as the monthly payments remain the same throughout the life of the mortgage. Option D is incorrect as the total dollar amount of principal being paid off each month remains the same throughout the life of the mortgage. Option E is incorrect as a higher nominal interest rate means a higher amount of interest in the first payment.

Which of the Following Statements Regarding a 30-Year Monthly Payment