Which of the following statements regarding a 20-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT?
A) Exactly 10% of the first monthly payment represents interest.
B) The monthly payments will increase over time.
C) A larger proportion of the first monthly payment will be interest, and a smaller proportion will be principal, than for the last monthly payment.
D) The total dollar amount of interest being paid off each month gets larger as the loan approaches maturity.
E) The amount representing interest in the first payment would be higher if the nominal interest rate were 7% rather than 10%.

Question

Quizplus · Accepted Answer

With an amortized mortgage, the proportion of interest to principal in each monthly payment stays roughly the same over time. However, because the interest is being calculated on a declining balance, the proportion of the payment that goes towards principal increases over time, while the proportion that goes towards interest decreases. Therefore, the first monthly payment will have a larger proportion of interest and a smaller proportion of principal than the last monthly payment. The other choices are incorrect.

Which of the Following Statements Regarding a 20-Year Monthly Payment