Explain why, in a fixed-rate mortgage, the amount of the mortgage payment applied to interest declines over time, while the amount applied to the repayment of principal increases
What will be an ideal response?
With each monthly payment, an excess above the interest owed is paid. This extra serves to reduce the outstanding principal (or balance owed). With a reduced balance owed, the next monthly mortgage payment will consist of a lower amount of interest paid since the interest rate is multiplied times a lower balance. Since the payment is fixed, this means that more of the fixed payment can be applied to lower the principal. Hence, the monthly interest declines over time, while an increasing amount is applied to the repayment of the principal.
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