A borrower has an interest-only mortgage with a 10-year interest-only period followed by a 20-year amortization period. What happens to the monthly payment after the interest-only period ends?
Correct Answer
B) The payment increases significantly because principal and interest must be paid over the remaining term
After the interest-only period ends, the borrower must pay both principal and interest over the remaining amortization period. Since the principal must be repaid over a shorter timeframe (20 years instead of 30), the monthly payment increases significantly. This payment shock is a key risk of interest-only mortgages.
Why This Is the Correct Answer
After the interest-only period ends, the borrower must pay both principal and interest over the remaining amortization period. Since the principal must be repaid over a shorter timeframe (20 years instead of 30), the monthly payment increases significantly. This payment shock is a key risk of interest-only mortgages.
More Mortgage Knowledge Questions
A borrower is comparing two loan offers: Loan A has no points and 4.5% interest rate, Loan B has 2 points and 4.0% interest rate. The loan amount is $400,000. How much will the borrower pay upfront for the points on Loan B?
A lender charges a 1% origination fee on all loans. For a borrower obtaining a $250,000 mortgage, what is the maximum origination fee that can be charged without violating the points and fees test under the ATR/QM rule for a first-lien mortgage?
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A borrower is considering paying discount points to reduce their interest rate. Each point costs 1% of the loan amount and reduces the rate by 0.25%. On a $300,000 loan, how much would the borrower pay for 2 discount points?
A borrower asks about the difference between discount points and origination fees. What is the most accurate explanation?
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