What happens to mortgage payments when interest rates decrease on a variable rate mortgage with fixed payments?
Correct Answer
B) More of each payment goes toward principal
With a variable rate mortgage that has fixed payments, when interest rates decrease, the payment amount stays the same but more money goes toward paying down the principal balance. This effectively shortens the amortization period since less interest is being charged.
Why This Is the Correct Answer
Option B is correct because with a fixed payment variable rate mortgage, the monthly payment amount remains constant regardless of interest rate changes. When interest rates decrease, the interest portion of each payment becomes smaller, which means more of the fixed payment amount is automatically allocated toward principal reduction. This is a fundamental characteristic of how fixed payment variable rate mortgages operate - the payment allocation shifts between interest and principal based on rate movements while maintaining the same total payment amount.
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