On a $300,000 30-year fixed loan at a 6% annual interest rate, the first monthly principal-and-interest payment is $1,799. How much of that first payment reduces the principal balance?
Correct Answer
D) $299: interest of $1,500 is the balance times 6% divided by 12
D. Of the stated $1,799 payment, $299 reduces principal. Monthly interest is $300,000 × 0.06 ÷ 12 = $1,500. Subtract interest from the supplied principal-and-interest payment: $1,799 − $1,500 = $299. The resulting principal balance is $299,701. Scope and exceptions: Use the rounded payment supplied in this question and a regular monthly interest period. A precise amortization schedule may differ by cents; escrow, odd-day interest and fees are not included. Source: How mortgage amortization works — https://www.consumerfinance.gov/ask-cfpb/how-does-paying-down-a-mortgage-work-en-1943/
Why This Is the Correct Answer
D. Of the stated $1,799 payment, $299 reduces principal. Monthly interest is $300,000 × 0.06 ÷ 12 = $1,500. Subtract interest from the supplied principal-and-interest payment: $1,799 − $1,500 = $299. The resulting principal balance is $299,701. Scope and exceptions: Use the rounded payment supplied in this question and a regular monthly interest period. A precise amortization schedule may differ by cents; escrow, odd-day interest and fees are not included.
Why the Other Options Are Wrong
Option A: $899: interest and principal split roughly evenly at the start
Principal and interest are not split equally in this calculation.
Option B: $1,799: the whole first payment reduces the principal balance
It ignores interest owed for the month.
Option C: $1,500: the larger share always goes to principal in month 1
It mistakes interest for the principal portion.
Exam Tip
Principal reduction equals the P&I payment minus that period’s interest.
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