Finance
What is an 'interest-only loan' and what is the risk for Rhode Island borrowers?
AA loan where the borrower pays only principal each month
BA loan where the borrower pays only interest for a period, with no principal reduction, and must later begin amortizing the full balance or face a large payment increase✓ Correct
CA student loan product for real estate buyers
DA government loan requiring no interest payments
Explanation
An interest-only loan requires only interest payments for an initial period. When the interest-only period ends, payments rise sharply to include principal.
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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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