What type of loan is typically characterized by lower initial payments followed by higher payments later on?

• A. Fixed-rate mortgage
• B. Adjustable-rate mortgage
• C. Interest-only mortgage
• D. Balloon mortgage

Answer: (C)

The correct choice for this question is the interest-only mortgage. This type of loan allows borrowers to pay only the interest for a specific period, typically the initial years of the loan. During this interest-only phase, the payments are lower, which can be attractive to borrowers looking for reduced initial expenses. After this period ends, the borrower begins making higher payments that cover both the principal and interest, resulting in a notable increase in monthly payments.

In contrast, a fixed-rate mortgage maintains consistent monthly payments throughout the life of the loan, combining both principal and interest. An adjustable-rate mortgage features an interest rate that may change at specified intervals, which can lead to lower initial payments but carries the potential for future increases depending on the market index. Lastly, a balloon mortgage involves low payments over a period followed by a large payment at the end of the loan term, but it does not typically feature an extended period of only interest payments before reverting to higher amounts. Thus, an interest-only mortgage accurately describes the characteristics mentioned in the question.