Question

10. Frank Lewis has a 30-year, $100.000 mortgage with a nominal interest rate of 10 percent and monthly compounding. Which of the following statements regarding his mortgage is most correct? a. The monthly payments will decline over time. b. The proportion of the monthly payment that represents interest will be lower for the last payment than for the first payment on the loan. c. The total dollar amount of principal being paid off each month gets larger as the loan approaches maturity. d. Statements a and c are correct. e. Statements b and c are correct.

I know the answer is E, just would like it explained better

Answer 1

The correct answer is option e

Explanation:- The monthly payment on a mortgage consists of the principal and interest part of the mortgage amount borrowed. The amount paid each month remains fixed but the interest and principal part varies each month. First of all banks are eager to recover the interest on the mortgage as early as possible as the borrower may do a foreclosure of the loan. In such a situation the bank would have recovered maximum interest during the initial years of the payment. For this purpose banks allocate major part of the monthly payment for interest and less for principal in the first few years of the mortgage so that in the last payment the major part will be for the principal and not interest. At the end of each payment the interest part reduces and the principal part increases.