Question

What effect does increasing your amortization have on your P&I payments if all the other factors remain the same? It:

a) Increases P&I payments.
b) Doubles P&I payments.
c) Decreases P&I payments.
d) Does nothing to P&I payments.

Answer 1

Increasing your amortization decreases your monthly P&I payments by spreading the loan payments over a longer period, though it results in more total interest paid over the life of the loan.

Step-by-step explanation:

When you increase your amortization period on a loan (amortization is the process of spreading out a loan into a series of fixed payments over time), it actually has the effect of decreasing your principal and interest (P&I) payments. This is because the payments are being spread out over a longer period of time. However, it's important to note that while this reduces the monthly financial burden, it increases the total amount of interest paid over the life of the loan. The correct answer to the student's question is therefore (c) Decreases P&I payments.

The explanation provided about bonds and interest rates references how present value and the valuation of investments change with interest rate fluctuations but does not directly relate to the question about amortization effects on P&I payments.