Finance
A mortgage that requires the borrower to pay interest only for a set period, after which they must pay off the full principal balance, is called a:
AAmortized mortgage
BBalloon mortgage✓ Correct
CGraduated payment mortgage
DWraparound mortgage
Explanation
A balloon mortgage requires interest-only or partial amortization payments for a set period, then a large 'balloon' payment of the remaining principal at the end of the term. They carry the risk that the borrower may not be able to refinance when the balloon payment is due.
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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.
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.
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.
Math Concepts
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