Final answer:
The belief that the portion of a mortgage payment applied to the principal balance decreases over time is false. Instead, more of the installment goes towards principal as time goes on, due to the structure of the amortization schedule in a fixed-rate mortgage.
Step-by-step explanation:
The statement that the portion of the installment allocated to the principal balance of a mortgage decreases over time is false. Initially, a larger portion of each payment goes towards interest, and over time, as the principal balance decreases, less interest accrues and more of each installment goes towards paying down the principal. This is because mortgages are typically structured with an amortization schedule that spreads payments over the loan's term, which can be 15 or 30 years. As the loan progresses, the proportion allocated to interest decreases while the proportion paying down the principal increases.
For example, consider a $100,000 mortgage with a fixed interest rate over 30 years. In the earlier years, a significant part of the monthly installment covers the interest due to the larger principal amount. However, as the principal slowly gets reduced with each payment, the interest charge on the remaining balance also becomes smaller, allowing more of the monthly installment to be applied towards the principal. This is how a borrower gradually builds equity in their home.
Lenders assess risk based on a borrower's credit history and the likelihood of timely repayment. A borrower who has been late on loan payments may appear riskier, affecting the loan's value in the secondary loan market. Interest rate fluctuations also impact the attractiveness of a mortgage loan in the market. If interest rates rise, a fixed-rate loan made at lower interest rates may be valued less when sold in the secondary market. The primary loan market refers to where loans are originated, and the secondary market refers to where loans are traded among investors.