If a Mortgage requires fixed payments every month for 15 yrs, which of the following is true?Group of answer choicesEarly payments contained the most interest, while later payments contain more principalThe percentage of the payment going to interest goes up over timeThe amount of interest paid each month increases over timeThe same amount of principal is repaid with every payment
Question
If a Mortgage requires fixed payments every month for 15 yrs, which of the following is true?Group of answer choicesEarly payments contained the most interest, while later payments contain more principalThe percentage of the payment going to interest goes up over timeThe amount of interest paid each month increases over timeThe same amount of principal is repaid with every payment
Solution
The correct answer is: Early payments contain the most interest, while later payments contain more principal.
Here's why:
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When you start paying off a mortgage, the loan balance is at its highest. Therefore, the interest, which is calculated based on the outstanding balance, is also at its highest.
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As you continue to make payments, a portion of each payment goes towards reducing the principal balance. As the principal balance decreases, so does the amount of interest because it's calculated on a smaller balance.
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Over time, more and more of each payment goes towards the principal because the interest portion decreases. This means that later payments contain more principal than earlier ones.
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The percentage of the payment going to interest does not go up over time. In fact, it decreases over time because the interest is calculated on a decreasing balance.
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The amount of interest paid each month does not increase over time. It decreases because the interest is calculated on a decreasing balance.
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The same amount of principal is not repaid with every payment. In the early years, a smaller portion of each payment goes towards the principal. As time goes on, a larger portion of each payment goes towards the principal.
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