Balloon Mortgages Flashcards
the balloon mortgage which is appropriate for the repayment structure. You will learn why this mortgage isn’t very popular, but why some types of borrowers may benefit vastly from it. If you are familiar with this mortgage then you will be tested on what it is, what it does, and how it may be riskier for the lender and client more than other loans.
What is a balloon mortgage?
A. A loan where repayments slowly increase over time until paid.
B. A loan with high monthly repayments and a large lump sum at the end.
C. A loan with low repayments and a large lump sum at the end.
D. A loan with no down payments and fixed repayment amounts.
Correct answer: C
C is correct because a balloon mortgage is a high-risk loan offered to those that want to benefit from low repayments at the start of a lending period and pay off the debt in a large lump sum at the end.
What statement about balloon mortgages is not true?
A. Regular repayments are high.
B. Investment buyers benefit from low repayments.
C. Balloon mortgages are short-term loans of 5-7 years.
D. Borrowers can choose to pay nothing except interest each month.
Correct answer: AA is correct, as balloon mortgages appeal to buyers because they offer a choice of repaying a loan in small installments or as a lump sum at the end of the short-term loan tenure. So, repayments are never high until the end of the tenure, when the borrower must pay off the rest of
the loan in a lump sum. Balloon mortgages are short-term loans of 5-7 years and are great for resellers with flexible payments
A balloon mortgage is categorized by its repayment structure with low payments increasing over time. Can borrowers make interest-only repayments or particle payments?
A. True.
B. False.
Correct answer: A is correct because of the nature of balloon mortgages where repayments are small and then slowly increase over time. This unique structure gives borrowers the power to choose what their repayments will be, including just interest-only payments or more, they just
have to ensure they pay it all back in full by the end of the loan period.
Balloon mortgages come with them a lot of baggage so, why might a lender not offer a balloon mortgage?
A. A balloon mortgage has a lot of risks.
B. It is difficult to sell to mortgage buyers.
C. A lender cannot change interest rates.
D. A & B.
Correct answer: D
D is correct, as a balloon mortgage brings much risk to lenders because they
need to judge whether a buyer can pay off the loan within the seven-year time frame and cope with the ballooning nature of the repayment structure. Lenders also find that mortgage buyers will avoid these types of mortgages well. C is incorrect because a lender can change interest rates after the fixed rate period ends, leading to larger repayments leading up to the final lump-sum payment deadline.
What should a borrower consider when signing a balloon mortgage?
A. The innate structure of the repayment balloon mortgage.
B. That they have good saving habits despite initial repayments being low.
C. They can pay the lump sum at the end of the tenure.
D. All the above.
Correct answer: D
D is correct, as a balloon mortgage is one of the riskier homes loans a borrower can get despite having its benefits. If they have good saving habits and are aware of the repayment balloon structure with a good income, they may be okay with paying most of the loan at the end or sooner. Although it
is easy to not take full advantage of the low-interest rates at the start and find very quickly, the costs build up towards the end.
