California Real Estate SalespersonFinancingMedium
A homeowner has a 30-year fully amortized fixed-rate loan. As the loan matures over time, which of the following occurs with each successive monthly payment?
- AThe portion applied to interest increases while the portion applied to principal decreases
- BBoth the principal and interest portions remain constant throughout the loan term
- CThe portion applied to principal increases while the portion applied to interest decreases
- DThe total payment amount increases each year to keep pace with the loan balance
Show answer & explanationAnswer & explanation
Correct answer: C. The portion applied to principal increases while the portion applied to interest decreases
In a fully amortized loan, the total monthly payment stays the same, but because interest is calculated on the remaining declining balance, the interest portion decreases over time while the principal portion increases correspondingly.
Why the other options are wrong
- A. This describes the opposite of what actually happens in amortization.
- B. The payment total is constant, but the interest/principal split changes each month.
- D. A fully amortized fixed-rate loan keeps the same payment amount for the entire term.
Amortization Schedule
A fully amortized loan has a fixed total payment, but the interest/principal split shifts over time as the balance declines.
- Early payments are interest-heavy
- Later payments are principal-heavy
- Total payment amount stays constant on a fixed-rate loan
Memory trick: Interest shrinks, principal grows as the balance flows.