A California borrower has a fully amortized 30-year deed of trust loan. As the borrower makes payments over time, how does the allocation between interest and principal change?
Correct Answer
C) The interest portion decreases and the principal portion increases over time
In a fully amortized loan with fixed payments, early payments are mostly interest because the balance is highest. As the principal balance decreases with each payment, less interest accrues, so more of each subsequent payment goes toward principal reduction.
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Related Topics & Key Terms
Key Terms:
Related Concepts
The debt-to-income ratio (DTI) compares a borrower's monthly debt obligations to their gross monthly income. It is used by lenders to determine how much mortgage a borrower can afford.
In the context of foreclosure, a deed transfers ownership of the foreclosed property to the new owner, typically the buyer at a foreclosure sale.
Discount points are upfront fees paid to a lender at closing to reduce (buy down) the interest rate on a mortgage loan. One point equals 1% of the loan amount and typically reduces the rate by approximately 0.25%.
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