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FRM Part I · FRM Exam Part I · Mortgages and Mortgage-Backed Securities

A borrower takes a $300,000 fixed-rate, level-payment mortgage with a 30-year term and monthly payments. Which statement best describes how the payment is split between interest and principal over the life of the loan?

In a fixed-rate level-payment mortgage, early payments are mostly interest and the principal portion rises over time. Interest is charged on the outstanding balance, which is largest at the start and shrinks as principal is repaid, so more of the fixed payment goes to principal later.

  1. AInterest and principal portions stay constant each month
  2. BEarly payments are mostly interest, and the principal share rises over timeCorrect
  3. CEarly payments are mostly principal, and the interest share rises over time
  4. DPrincipal is repaid only at maturity as a balloon payment

Explanation

In a level-payment fully amortizing mortgage, interest each month is the rate times the outstanding balance. The balance is highest at the start, so interest dominates early, and the principal share grows as the balance declines. Option C reverses this relationship.

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