Explanation:
Statement II is incorrect. In a fixed-rate level payment mortgage, the amount of principal payment remains constant throughout the life of the mortgage. This means that the borrower pays the same amount of principal with each installment, but the interest portion decreases over time as the outstanding principal balance decreases.
Statement III is incorrect. Service fees in a fixed-rate level payment mortgage typically do not decline as time passes. These fees, which include administrative and servicing costs, remain relatively stable over the life of the mortgage. They are not tied to the passage of time but rather to the ongoing management of the mortgage.
Statement I is correct. In a fixed-rate level payment mortgage, the interest payment decreases over time because the interest is calculated based on the outstanding principal balance. As the borrower makes regular payments, the outstanding balance reduces, leading to lower interest costs.
Statement IV is correct. This feature is consistent with fixed-rate level payment mortgages. When mortgage rates decrease, borrowers are more likely to refinance their existing mortgages to take advantage of lower rates.
Q.927 Adam Levy teaches the finance and investment courses at the Mumbai College of Economics. During one of his lectures on the subject of mortgages and mortgage-backed securities, he mentioned the following four features of a fixed rate level payment mortgage:
I. The amount of interest payment in a fixed-rate mortgage decreases as the maturity date of the mortgage approaches
II. The amount of principal payment on a fixed-rate mortgage decreases as time passes
III. Service fees in a fixed-rate mortgage decline as time passes
IV. The prepayment risk to the lender of the mortgage increases as the mortgage rates decrease
Which of the above-mentioned features is/are inconsistent with the features of fixed-rate level payment mortgages?
A
I only.
B
II only.
C
I and III.
D
II and III.
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