A fully amortizing fixed-rate payment is $1,500. The interest due for the month is $1,100, and there are no fees or escrow items in that payment. How much reduces principal?
Correct Answer
D) $400
Why this is correct: In a fully amortizing payment, the portion applied to principal is the total P&I payment minus the interest due for that period. Calculation: $1,500 (total P&I payment) - $1,100 (interest due) = $400 applied to principal reduction. Why the other choices are wrong: "$1,100" is wrong; this is the interest portion, not the principal reduction. "$1,500" is wrong; this is the entire payment, not the amount reducing principal. "$2,600" is wrong; this incorrectly adds the payment and interest instead of subtracting. Exam tip: Principal reduction = Total P&I Payment - Accrued Interest. This is a fundamental amortization calculation.
Why This Is the Correct Answer
Why this is correct: In a fully amortizing payment, the portion applied to principal is the total P&I payment minus the interest due for that period. Calculation: $1,500 (total P&I payment) - $1,100 (interest due) = $400 applied to principal reduction. Why the other choices are wrong: "$1,100" is wrong; this is the interest portion, not the principal reduction. "$1,500" is wrong; this is the entire payment, not the amount reducing principal. "$2,600" is wrong; this incorrectly adds the payment and interest instead of subtracting. Exam tip: Principal reduction = Total P&I Payment - Accrued Interest. This is a fundamental amortization calculation.
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