Question

Determine whether the statement below makes sense or does not make sense and explain your reasoning.
There must be an error in the loan amortization schedule for my mortgage because the annual interest rate is only 2.6​%, yet the schedule shows that​ I'm paying more on interest than on the principal for many of my payments.
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Part 1
Choose the correct answer below.
A.
The statement does not make sense because the amount paid to the principal never changes. The interest decreases as the balance decreases and​ should, therefore, be lower than the principal payment.
B.
The statement makes sense because the monthly payments are applied to the principal first and then to the interest. ​ Therefore, the principal payments should always be higher than the interest payments.
C.
The statement does not make sense because the monthly payments are applied to the interest first and then to the principal. The interest will decrease as the balance​ decreases, but for many​ payments, the interest payments will be higher.
D.
The statement makes sense because using the simple interest formula with the given interest​ rate, the interest payment should not be very high. ​ Therefore, more should be paid to the principal for each monthly payment.

Answer 1

C.

The borrower's claim that the schedule must be wrong is incorrect. For an amortizing mortgage each monthly payment is first applied to that month's interest (balance × monthly rate) and the remainder reduces principal. Early in a long loan the balance is large, so the interest portion can exceed the principal portion even at a low annual rate like 2.6%. As the balance falls, the interest portion shrinks and the principal portion grows.