In a fully amortizing fixed-rate mortgage, what happens to the principal and interest portions of the monthly payment over the life of the loan?
Correct Answer
B) The principal portion increases while the interest portion decreases
In a fully amortizing fixed-rate mortgage, the total monthly payment remains constant, but the allocation changes over time. Early payments consist mostly of interest, but as the principal balance decreases, less interest is owed, so more of each payment goes toward principal reduction. This is the fundamental characteristic of loan amortization.
Why This Is the Correct Answer
In a fully amortizing fixed-rate mortgage, the total monthly payment remains constant, but the allocation changes over time. Early payments consist mostly of interest, but as the principal balance decreases, less interest is owed, so more of each payment goes toward principal reduction. This is the fundamental characteristic of loan amortization.
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