Finance
Which of the following is a characteristic of an interest-only mortgage?
AThe principal balance is paid off faster than a conventional mortgage
BMonthly payments cover only interest, so the loan balance does not decrease during the interest-only period✓ Correct
CNo interest is charged for the first 5 years
DThe interest rate is always fixed for the life of the loan
Explanation
During the interest-only period of an interest-only mortgage, monthly payments cover only the interest with no principal reduction. When the interest-only period ends, the payment increases to amortize the full remaining balance, which can be a significant 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.
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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