Calculating Amortized Loan
Payments
Why is calculating for amortized loans different? Correct Ans -
Because even though the payment amount stays the same throughout the
life of the loan, what that payment goes towards changes. That's because
the interest is always based on the current principal amount. As the
principal balance goes down, the interest payments go down.
What are the two portions of a mortgage payment? Correct Ans -
Interest: the rate the borrower pays the lender in exchange for the money
lent
Principal: the remaining amount of the monthly payment goes towards the
borrower's remaining principal
In an amortized loan, the monthly interest payment is always based on:
A. the last interest payment
B. the remaining principal
C. the original principal
D. the cost of discount points Correct Ans - B
Why is it good for a borrower to make larger mortgage payments if they
can?
A. the interest rate will decrease, resulting in smaller payments
B. it will decrease the amount of money they pay in interest
C. it will improve their credit score
D. banks need the funds so they can lend more money, stabilizing the
market Correct Ans - b
T/F - Over the course of an amortized loan's life, the borrower's payments
will increasingly be allocated towards interest payments. Correct Ans -
False: Amortized loans are front-loaded with higher interest payments,
because the amount paid in interest is directly related to the principal
balance. As the principal decreases, the amount going towards interest will
decrease.
T/F - The interest payments are always based on the current principal
balance, so the amount of money that goes towards interest will decrease as
the principal balance decreases. Correct Ans - T
Which of these explains why the amount of money that goes towards
interest decreases after each payment?
A. bc the interest payments are always based on the current principal
balance
