Which of the following would not best describe a risk associated with a non-traditional mortgage loan?

Which of the following would not best describe a risk associated with a non-traditional mortgage loan?

• A. A low fixed payment
• B. An adjustable rate
• C. Payment shock
• D. Negative amortization

Answer: (A)

Non-traditional mortgage loans bring risks tied to how payments and loan balances can change over time. The real concerns here are how the payment can shift because the rate is adjustable, or because the loan structure allows the balance to grow even while payments are made. An adjustable rate means the interest rate can rise, leading to higher monthly payments. Payment shock describes the situation where a borrower suddenly faces a large jump in payment after a rate reset or after a period of low payments. Negative amortization occurs when the payments made don’t cover the accruing interest, so the loan balance increases over time instead of decreasing. A low fixed payment, while it might be attractive at first, does not itself describe a risk in the context of non-traditional loans; the risks are the rate changes, payment shocks, and potential negative amortization that these loan types can entail.

Non-traditional mortgage loans bring risks tied to how payments and loan balances can change over time. The real concerns here are how the payment can shift because the rate is adjustable, or because the loan structure allows the balance to grow even while payments are made. An adjustable rate means the interest rate can rise, leading to higher monthly payments. Payment shock describes the situation where a borrower suddenly faces a large jump in payment after a rate reset or after a period of low payments. Negative amortization occurs when the payments made don’t cover the accruing interest, so the loan balance increases over time instead of decreasing. A low fixed payment, while it might be attractive at first, does not itself describe a risk in the context of non-traditional loans; the risks are the rate changes, payment shocks, and potential negative amortization that these loan types can entail.