New York Real Estate Salesperson ExaminationFinancingMedium
A potential homebuyer is concerned about fluctuating interest rates and wants to ensure their monthly mortgage payments remain constant over the life of the loan. Which of the following mortgage types would best meet this buyer's requirement?
- AAdjustable-Rate Mortgage (ARM)
- BFixed-Rate Mortgage
- CBalloon Mortgage
- DInterest-Only Mortgage
Show answer & explanationAnswer & explanation
Correct answer: B. Fixed-Rate Mortgage
A fixed-rate mortgage has an interest rate that remains constant for the entire term of the loan, ensuring consistent monthly principal and interest payments and predictability for the borrower.
Why the other options are wrong
- A. An Adjustable-Rate Mortgage (ARM) has an interest rate that changes periodically, leading to fluctuating monthly payments.
- C. A balloon mortgage has relatively low payments for a short period, followed by one large lump-sum payment at the end, not constant payments over the loan's life.
- D. An interest-only mortgage requires only interest payments for an initial period, leading to a large principal payment later or higher payments when principal repayment begins.
Fixed-Rate Mortgage
A mortgage loan where the interest rate remains the same for the entire term of the loan, resulting in predictable, unchanging monthly principal and interest payments.
- Constant interest rate.
- Predictable monthly payments.
- Common terms are 15, 20, or 30 years.
Memory trick: Fixed means 'forever the same,' adjustable means 'always changing.'