Finance
A Montana borrower is considering a 'interest-only mortgage' for the first 10 years. They should understand that during the interest-only period:
AThey are building equity through principal reduction each month
BThey are paying only interest and building no equity through payments (the loan balance does not decrease)✓ Correct
CThey have lower risk than with a traditional amortizing loan
DThe interest rate is fixed and cannot change
Explanation
During the interest-only period, borrowers pay only interest with no principal reduction, building no equity through payments. After the interest-only period ends, payments increase significantly to amortize the full remaining balance.
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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.
Loan-to-Value Ratio (LTV)The ratio of a mortgage loan amount to the appraised value or purchase price of a property, expressed as a percentage.
Math Concepts
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