66. A couple bought their first home, qualifying for a 30-year loan. The lender required regular, equal payments of sufficient size and number to pay all interest due on the loan and reduce the amount owed to zero by the loan's maturity date. This is most likely
Answer: C
This is most likely a fully amortized loan.
A fully amortized loan involves regular, equal payments that cover both the interest and a portion of the principal, ensuring that the loan balance is reduced to zero by the end of its term.
A) a partially amortized loan.
A partially amortized loan does not fully pay off the principal by the end of the term; instead, it may require a large final payment or balloon payment after several years of regular payments. This option does not align with the scenario described, where the loan is intended to reduce to zero by maturity.
B) an ARM.
An adjustable-rate mortgage (ARM) features fluctuating interest rates that can change at set intervals, affecting the regularity and amount of payments. The scenario specifies regular, equal payments, which is characteristic of a fixed-rate loan rather than an ARM.
C) a fully amortized loan.
A fully amortized loan requires consistent payments that are structured to cover all interest and reduce the principal to zero by the loan's maturity date. This description perfectly matches the couple's situation, making this the correct option.
D) a straight loan.
A straight loan, or interest-only loan, involves payments that cover only interest for a specific period, with the principal being repaid later. This option is incorrect because the couple's loan requires regular payments that reduce the principal over time.
Conclusion
The fully amortized loan is the only option that accurately reflects the requirement for regular, equal payments designed to eliminate the principal entirely by the maturity date. The other options fail to meet this criterion, clearly distinguishing them from the described loan structure.