P3-78 quiz

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Question 1 of 8

1. Question
Which statement best describes how interest-only residential mortgage loans were typically structured before the Great Depression?
- A) They were long-term fully amortizing loans with principal paid down each month.
- B) They were 30-year fixed-rate loans designed for gradual equity build-up.
- C) They were government-insured loans with built-in equity sharing.
- D) They were short-term loans, usually less than 10 years, with no principal amortization and a required refinance at the end of the term.
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Question 2 of 8

2. Question
What event led to a spike in interest-only foreclosures and caused many lenders to stop making interest-only loans for the next 70 years?
- A) The stock market surged and homeowners rapidly paid off their mortgages.
- B) Real estate prices rose sharply and lenders tightened underwriting standards.
- C) Real estate prices collapsed during the Great Depression, and foreclosures on interest-only loans spiked.
- D) A new federal law permanently banned interest-only mortgages.
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Question 3 of 8

3. Question
When interest-only loans were reintroduced after their long absence, how were they primarily positioned in the marketplace?
- A) As mass-market products aimed primarily at subprime borrowers.
- B) As first-time homebuyer loans for low-income households only.
- C) As government-subsidized loans with reduced closing costs.
- D) As niche products for cash flow management purposes used by upscale borrowers.
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Question 4 of 8

4. Question
What is the first advantage of an interest-only mortgage described in the text?
- A) Borrowers are never required to document their income or assets.
- B) Monthly payments are always lower than rent on a comparable property.
- C) The interest rate can never adjust, regardless of market conditions.
- D) Monthly payments are initially lower than a conventional loan, allowing borrowers to afford a more expensive home if they can handle higher payments after the introductory period.
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Question 5 of 8

5. Question
Which strategy for using an interest-only loan may fail if market interest rates have risen by the time the introductory period ends?
- A) Planning to sell the home before the loan converts.
- B) Refinancing into a new interest-only loan at the end of the introductory period.
- C) Making extra principal payments during the introductory period.
- D) Expecting an increase in income before the introductory period is over.
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Question 6 of 8

6. Question
How can an interest-only loan allow a borrower to pay off the mortgage faster than with a conventional loan, according to the text?
- A) Extra payments reduce principal, and in an interest-only loan the lower principal immediately reduces the required payment each month, letting borrowers see the benefit right away.
- B) Because interest-only loans always carry a lower interest rate than conventional loans.
- C) Because the contractual loan term is always shorter than for conventional loans.
- D) Because lenders periodically forgive a portion of the remaining principal.
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Question 7 of 8

7. Question
Which example best illustrates the flexibility advantage of an interest-only loan described in the text?
- A) A borrower expects the lender to forgive missed principal payments during unemployment.
- B) A borrower’s payment automatically decreases every year, regardless of how much principal is paid.
- C) A borrower can choose not to pay property taxes while on an interest-only plan.
- D) A borrower applies bonuses and raises to principal but, during a hardship, temporarily returns to paying only interest.
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Question 8 of 8

8. Question
According to the text, for which type of borrower is an interest-only mortgage considered superior to a conventional mortgage?
- A) Borrowers who struggle with budgeting and money management.
- B) Borrowers who never intend to pay down any principal.
- C) Disciplined money managers who can use the payment flexibility responsibly.
- D) Borrowers who expect long-term declines in housing prices.
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