California Real Estate Broker ExaminationFinancingMedium
A real estate agent is explaining different types of loans to a first-time homebuyer. The buyer is concerned about fluctuating interest rates and wants a predictable monthly payment. Which type of loan would best suit their needs?
- AGraduated Payment Mortgage (GPM)
- BFixed-Rate Mortgage
- CAdjustable-Rate Mortgage (ARM)
- DInterest-Only Loan
Show answer & explanationAnswer & explanation
Correct answer: B. Fixed-Rate Mortgage
A fixed-rate mortgage maintains the same interest rate for the entire loan term, resulting in consistent principal and interest payments. This predictability is ideal for borrowers who want to avoid fluctuating payments.
Why the other options are wrong
- A. GPMs have payments that start low and gradually increase over time, which is not what the buyer is seeking for predictability.
- C. ARMs have interest rates that adjust periodically, leading to unpredictable monthly payments.
- D. Interest-only loans have lower payments initially but do not build equity and can have substantially higher payments later, offering less predictability in the long term.
Fixed-Rate Mortgage
A mortgage loan where the interest rate remains the same for the entire loan term, typically 15 or 30 years.
- Provides predictable monthly principal and interest payments.
- Protects borrower from rising interest rates.
- Often has a higher initial interest rate than an ARM.
Memory trick: Fixed Rates are 'F'orever 'F'ixed.