Alabama Real Estate Practice Exam

What characterizes an Interest-only mortgage?

1. A fixed interest rate for the life of the loan

2. Payments cover interest and principal equally

3. Initial period of interest-only payments followed by increased payments

4. Equal payments of interest throughout the loan term

The correct answer is: Initial period of interest-only payments followed by increased payments

An Interest-only mortgage is a type of mortgage where the borrower makes payments that only cover the interest on the loan for a certain period of time, typically around 5-10 years. This means that the borrower does not make any payments towards the principal amount during this initial period, leading to lower monthly payments. However, after this period ends, the payments increase to cover both the interest and principal, usually resulting in higher payments than a traditional mortgage. Options A, B, and D are incorrect because they do not accurately describe an Interest-only mortgage. Option A mentions a fixed interest rate, which can be a feature of some Interest-only mortgages, but it is not the defining characteristic. Option B mentions equal payments towards both interest and principal, but this is not the case for an Interest-only mortgage during the initial period. Option D only mentions equal interest payments, but it does not address the