Question

Which of the following statements regarding a 20-year (240-month) $225,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.)a. The outstanding balance declines at a slower rate in the later years of the loan's life.b. The remaining balance after three years will be $225,000 less one third of the interest paid during the first three years.c. Because it is a fixed-rate mortgage, the monthly loan payments (which include both interest and principal payments) are constant.d. Interest payments on the mortgage will increase steadily over time, but the total amount of each payment will remain constant.e. The proportion of the monthly payment that goes towards repayment of principal will be lower 10 years from now than it will be the first year.

Answer 1

Answer:

c. Because it is a fixed-rate mortgage, the monthly loan payments (which include both interest and principal payments) are constant

CORRECT The interest will decrease while principal increase leaving a net effect of zero through the life of the loan

Explanation:

a. The outstanding balance declines at a slower rate in the later years of the loan's life

FALSE the principal decreases at a higher rate in the lather years as the interest component decreases.

b. The remaining balance after three years will be $225,000 less one third of the interest paid during the first three years

FALSE to know this we need to know the rate

d. Interest payments on the mortgage will increase steadily over time, but the total amount of each payment will remain constant

FALSE as a portion of the principal is being paid, the interest component decreases over time

e. The proportion of the monthly payment that goes towards repayment of principal will be lower 10 years from now than it will be the first year.

FALSE the porportion to pay the principal increase through time.