Finance
What is an 'interest-only loan' and what are its risks for Idaho borrowers?
AA loan with no principal balance; risk-free for borrowers
BA loan where initial payments cover only interest, not principal; risk is that the borrower builds no equity and faces higher payments when principal repayment begins✓ Correct
CA loan required only for investment properties
DA loan with a guaranteed interest rate for the full term
Explanation
Interest-only loans require only interest payments for an initial period (typically 5-10 years). After that period, payments increase to cover both principal and interest (payment shock).
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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.
Private Mortgage Insurance (PMI)Insurance required by lenders on conventional loans with less than 20% down payment, protecting the lender — not the borrower — against default.
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.
Math Concepts
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