P3-81 quiz

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Question 1 of 5

1. Question
Why do interest-only loans typically carry higher interest rates compared to conventional loans?
- A) Because federal law caps conventional loan rates but not IO rates.
- B) Because IO loans automatically include PMI, increasing the rate.
- C) Because IO loans always convert to negative amortization loans.
- D) Because IO loans are riskier and less marketable, so lenders charge higher rates and require larger down payments.
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Question 2 of 5

2. Question
What is a major risk of an interest-only loan that has a variable interest rate?
- A) The rate is guaranteed to drop every year.
- B) The loan becomes fully forgiven if rates rise.
- C) If benchmark rates rise, the interest payment rises, increasing the borrower’s monthly cost.
- D) The loan automatically converts to fixed-rate after one year.
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Question 3 of 5

3. Question
Why won’t monthly payments decrease during the interest-only period unless the interest rate adjusts lower?
- A) Because principal is paid down aggressively during the IO period.
- B) Because IO loans require yearly balance recasting.
- C) Because the lender forces payment increases regardless of balance.
- D) Because no principal is paid during the IO period, so payments stay the same unless the interest rate adjusts lower.
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Question 4 of 5

4. Question
In the example given, why does the borrower’s payment increase sharply after the first 10 years?
- A) Because the lender increases the loan balance after 10 years.
- B) Because the IO period ends and the loan must amortize principal over the remaining 20 years.
- C) Because taxes and insurance double automatically after the IO period.
- D) Because the borrower must refinance every 10 years.
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Question 5 of 5

5. Question
What is a key difference between conventional fixed-rate loans and interest-only loans?
- A) Conventional loans allow negative amortization while IO loans do not.
- B) IO loans always have lower lifetime interest costs than conventional loans.
- C) IO loans guarantee identical payments every month for 30 years.
- D) Conventional loans keep payments the same each month, while IO payments can change based on rate adjustments, extra payments, or conversion to amortizing.
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