Question

Explain why in a fixed-rate mortgage, the amount of the mortgage payment applied to interest declines over time, while the amount applied to the repayment of principal increases.

Answer 1

Answer:

In fixed rate mortgage, the amount applied to the repayment of principal increases as the payment involves lower proportion of principal amount and higher proportion of interest, while the payment made against mortgage being applied to interest decrease over time.

With maturing mortgage, the interest portion will decrease and the portion of principle underlying the payment will increase. The calculation of the interest charged on the mortgage is made of the present mortgage balance that remains outstanding which decrease with increase in the repayment of the principal. Hence, it is ascertained that the smaller the principal underlying mortgage is, the lesser will be the interest charged underlying the mortgage.