The Ultimate Interest-Only Loan Quiz
An interest-only loan has both advantages and disadvantages, depending on who you are, what you want and how disciplined you are. For starters, check out your discipline skills by taking this quiz.
In what years was the biggest housing boom in the U.S. since the 1950s?
Two factors contributed to the new era of construction and rebuilding. What were they?
- low interest rates and new-found wealth
- cheap labor and an abundance of construction materials
- large bank loans and inexpensive raw materials
During the housing boom of the years 2001-2005, who were lenders willing to lend money to for housing loans?
- the unemployed
- poor people only
- any gainfully employed person
With regard to a home mortgage, there are two parts: the principal and the interest. How do they differ?
- principal = the standard you go by; interest = how much you are interested in taking out the loan
- interest = the amount of the loan; principal = the "fee" for the loan, spread out over a few years.
- principal = the amount of the loan; interest = the "fee" for the loan, spread out over a few years.
What is the common duration of an interest-only loan?
- two to five years
- five to 10 years
- 10 to 15 years
How long have interest-only loans been in existence in the U.S.?
- for nearly 80 years
- for 50 years
- for 30
If you want to repay part of the principal when you like, is there a penalty with an interest-only loan?
- it depends on the lender
With an interest-only loan, monthly payments are usually much less than with a fixed-rate:
What is "fixed" about a fixed-rate mortgage?
- the principal, which is set according to the housing industry
- the interest rate, which is set for the duration of the loan
- the eligibility of the borrower, which is set according to certain criteria
What is the formal term used for the process of periodic payments over time?
Under an interest-only (IO) loan, initially your monthly payments cover the interest only and are quite low. What happens after that?
- The IO part finishes and your loan is virtually paid up already.
- The IO part finishes and you're left with having to pay off the principal over many more years.
- The IO part finishes and you're left with having to pay off the principal over fewer years.
Which of these would be likely to benefit from an IO loan, whereby payments are low at first but high later on?
- people who expect a pay raise in the coming years
- people who can't deal with large sums of money
- people who are cautious yet generous
Why do people with a fluctuating income find an IO loan useful?
- because they don't need to pay anything whenever their monthly income dips below a certain point
- because they only pay something when they can afford it
- because they can repay part of the principal when they are able to, without penalty
With an IO loan, are people more likely or less likely to buy a "starter" house?
- neither, it has no bearing
- more likely
- less likely
How do some people invest their money that they've saved from an IO loan?
- They invest in further housing options.
- They invest in the stock market.
- They invest in the hi-tech industry.
If your home is not expected to increase in value, should you take out an IO loan?
- probably not
- yes, definitely
- yes, as long as your income is expected to remain stable
How do adjustable-rate mortgages work?
- They have a long-term fixed rate, then an adjusted rate that remains set till the last payment is made.
- They have a short-term fixed rate, then an adjusted rate that changes from time to time.
- They have a short-term fixed rate, then an adjusted rate that remains set till the last payment is made.
They say that adjustable-rate mortgages (ARMS) are risky. Are they?
- Only if you don't know what you're doing.
- No. Who told you that, anyway?
- Yes, because you're taking a gamble that the loan rate will go down.
If you want an IO loan to work for you, what's the single most important factor to make it a success?
- fiscal discipline
- good connections with your broker
- an excellent command of mathematics
What is meant by "payment shock"?
- the realization that you have to start paying something every month
- the stark reality that once your IO loan has expired, you now have high monthly payments for the duration of the loan
- the sudden shock of having to pay, whereas you were hoping you wouldn't