Principal and Interest Payment (P&I)

### What components are included in a Principal and Interest Payment (P&I)? - [x] The interest charges for the period and a portion of the principal balance. - [ ] Only the interest charges for the period. - [ ] Only a portion of the principal balance. - [ ] The interest charges for the period and principal, along with taxes and insurance. > **Explanation:** A Principal and Interest Payment (P&I) includes both the interest charges for the period and a portion of the principal balance, but does not include taxes or insurance. ### How does making extra principal payments affect a loan? - [x] It reduces the loan balance faster and decreases the total interest paid. - [ ] It increases the interest rate. - [ ] It doubles the interest payments. - [ ] It extends the loan term. > **Explanation:** Making extra principal payments reduces the remaining loan balance more quickly, thereby decreasing the amount of total interest paid over the life of the loan. ### Which component tends to decrease over time in an amortizing loan? - [x] Interest portion of the P&I payment - [ ] Principal portion of the P&I payment - [ ] Entire P&I payment - [ ] Amortization schedule > **Explanation:** In an amortizing loan, the interest portion of the P&I payment generally decreases over time, allowing more of the payment to go toward the principal balance. ### In the context of a fixed-rate loan, does the P&I payment change over the loan period? - [ ] Yes, it fluctuates frequently. - [x] No, the total P&I payment remains the same. - [ ] It increases in the first half and decreases in the second half. - [ ] The P&I payment varies based on inflation. > **Explanation:** In a fixed-rate loan, the total P&I payment remains the same over the entire loan period, although the distribution between principal and interest changes. ### What determines the initial proportion of interest vs. principal in P&I payments? - [ ] The age of the borrower - [ ] The annual withdrawal limit - [x] The loan's interest rate and term - [ ] The credit score of the borrower > **Explanation:** The loan's interest rate and term determine the initial proportion of interest versus principal in P&I payments. ### Why is amortization important in understanding P&I payments? - [x] It explains how the principal balance is reduced over time - [ ] It predicts future interest rates - [ ] It determines property taxes - [ ] It generally has no impact on principal reduction > **Explanation:** Amortization is important because it explains how the principal balance is systematically reduced over time through regular P&I payments. ### How do adjustable-rate loans impact P&I payments? - [ ] The P&I payments are fixed and do not change. - [x] The P&I payments can vary with interest rate changes. - [ ] The principal is never reduced. - [ ] The total interest over the life of the loan remains constant. > **Explanation:** In adjustable-rate loans, P&I payments can vary based on changes in the loan's interest rate. ### Which part of the P&I payment starts higher and decreases over time in a typical mortgage? - [x] The interest portion - [ ] The principal portion - [ ] The fixed portion - [ ] Tax and insurance portion > **Explanation:** In a typical mortgage, the interest portion of the P&I payment starts higher and decreases over time, while the principal portion increases. ### What effect does refinancing have on P&I payments? - [ ] It completely eliminates them. - [x] It can change both the payment amount and the distribution of principal and interest. - [ ] It only changes the interest rate. - [ ] Refinancing has no impact on P&I payments. > **Explanation:** Refinancing can change the total P&I payment amount as well as the distribution between principal and interest due to changes in the interest rate and/or loan term. ### Why is the Mortgage Constant important in comparing loans? - [ ] It measures the borrower's credit score. - [x] It helps compare annual debt service relative to loan amount. - [ ] It calculates property taxes. - [ ] It assesses the loan's impact on property value. > **Explanation:** The Mortgage Constant is important because it helps compare the annual debt service relative to the loan amount, aiding in evaluating cash flow aspects for different loans.