Question

Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 8% is CORRECT?
A. Exactly 8% of the first monthly payment represents interest.
B. The monthly payments will decline over time.
C. A smaller proportion of the last monthly payment will be interest, and a larger proportion will be principal, than for the first monthly payment.
D. The total dollar amount of principal being paid off each month gets smaller as the loan approaches maturity.
E. The amount representing interest in the first payment would be higher if the nominal interest rate were 6% rather than 8%.

Answer 1

Answer:

C. A smaller proportion of the last monthly payment will be interest, and a larger proportion will be principal, than for the first monthly payment.

Explanation:

I prepared a summary of an amortization schedule to explain this:

principal = $100,000

r = 8% annual

n = 360 months

first payment = $733.76: $666.67 are interests and only $67.09 reduces principal

second payment = $733.76: $665.95 are interests and only $67.54 reduces principal

last payment = $733.76: $4.90 are interests and only $728.86 reduces principal to $0