Understanding Mortgages and Balloon Payments

The video tutorial explains traditional fixed-rate mortgages, focusing on the amortization process and how payments are structured over 30 years. It introduces balloon payment loans, highlighting their unique structure where the term is shorter than the amortization period, requiring a large final payment. The video discusses the interest rate risk distribution between banks and borrowers and why some borrowers might opt for balloon payment loans, such as lower interest rates or short-term property ownership plans.

What is the primary characteristic of a traditional fixed-rate mortgage?

• Variable monthly payments

• Fixed monthly payments

• Balloon payments at the end

• Interest-only payments

In a traditional 30-year fixed mortgage, how does the composition of interest and principal change over time?

• Interest decreases, principal increases

• Both interest and principal remain constant

• Interest and principal both increase

• Interest increases, principal decreases

What is a key difference between a balloon payment loan and a traditional mortgage?

• Balloon loans are only available for commercial properties

• Balloon loans require no monthly payments

• Balloon loans have a shorter term than their amortization period

• Balloon loans have a fixed interest rate

At the end of a balloon payment loan term, what is typically required?

• Continue making monthly payments

• No further action is needed

• Refinance the loan automatically

• Pay off the remaining principal balance

Why might a bank prefer a balloon payment loan over a traditional fixed-rate mortgage?

• It reduces the bank's interest rate risk over the long term

• It allows the bank to take on more interest rate risk

• It guarantees a higher interest rate for the bank

• It requires no down payment from the borrower

How does a balloon payment loan compare to an adjustable-rate mortgage in terms of interest rate risk?

• Balloon loans eliminate interest rate risk

• Balloon loans share risk between borrower and bank

• Balloon loans transfer all risk to the bank

• Balloon loans transfer all risk to the borrower

What is a potential advantage for a borrower choosing a balloon payment loan?

• Lower interest rate compared to a 30-year mortgage

• Higher monthly payments

• Guaranteed loan approval

• No need to pay off the loan

Why might a borrower opt for a balloon payment loan if they plan to sell their property within a few years?

• To ensure a longer loan term

• To take advantage of a lower interest rate

• To benefit from lower monthly payments

• To avoid paying any interest

What is a risk associated with balloon payment loans for borrowers?

• Guaranteed loan approval

• Need to refinance or pay off a large balance at the end

• No risk involved

• Fixed interest rate throughout the term

What should a borrower consider if they plan to refinance a balloon payment loan at the end of its term?

• Their current credit history and income level

• The original loan amount

• The property's market value

• The bank's interest rate policy