Finance
Interest-only loans were popular before the 2008 financial crisis because they:
AHad lower total interest costs than amortizing loans
BOffered lower initial payments by deferring principal repayment✓ Correct
CWere insured by the federal government
DRequired no income verification
Explanation
Interest-only loans had lower initial monthly payments because borrowers paid only interest (no principal) during the interest-only period. This made homes temporarily more affordable but left borrowers with no equity buildup.
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Key Terms to Know
Amortization
The gradual repayment of a loan through scheduled periodic payments that cover both principal and interest.
Adjustable-Rate Mortgage (ARM)A mortgage with an interest rate that changes periodically based on a financial index, usually after an initial fixed-rate period.
Debt-to-Income Ratio (DTI)A lender's measure of a borrower's monthly debt obligations relative to their gross monthly income, used to evaluate loan eligibility.
Discount PointsPrepaid interest paid to a lender at closing to reduce the mortgage interest rate, with each point equal to 1% of the loan amount.
Math Concepts
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