Certified Financial Planner (CFP) Exam 2026 – 400 Free Practice Questions to Pass the Exam

To determine the principal reduction for the first year on a 20-year mortgage of $150,000 at an 8% interest rate, it's essential to understand how mortgage amortization works.

First, we need to calculate the monthly payment using the mortgage formula, which accounts for both principal and interest. The monthly payment can be computed using the principal, interest rate, and number of payments.

The formula for monthly mortgage payments is:

\[ M = P \times \frac{r(1 + r)^n}{(1 + r)^n - 1} \]

Where:

- \( M \) = monthly payment

- \( P \) = loan amount ($150,000)

- \( r \) = monthly interest rate (annual rate divided by 12)

- \( n \) = total number of payments (loan term in months)

For this example:

- Monthly interest rate \( r = \frac{0.08}{12} = 0.00666667 \)

- Total number of payments \( n = 20 \times 12 = 240 \)

Plugging in these values, we can calculate the monthly payment:

\[ M = 150,000 \times \frac{0.006666