Question 11

Borrowers are expected to pay the principal of an interest-only loan as a balloon payment at the end of the loan term.

In an interest-only loan, the borrower is required to pay only the interest during the loan term, with the entire principal amount due as a lump sum at the end, commonly referred to as a balloon payment.

A) in periodic monthly payments

This option is incorrect because an interest-only loan does not require the borrower to make periodic payments towards the principal. Instead, the borrower pays only the interest during the loan term.

B) as a balloon payment at the end of the loan term

This option is correct as it accurately describes the structure of an interest-only loan. The borrower pays only interest throughout the duration of the loan, with the full principal amount due in a single payment at the end of the term.

C) They aren't; interest over time will add up to more than the principal amount.

This option is misleading. While it is true that the borrower only pays interest initially, the principal is still due at the end of the term. The total amount paid will not exceed the principal due, but interest accumulates without reducing the principal.

D) only after the borrower refinances

This option is incorrect because refinancing is not a requirement for paying the principal in an interest-only loan. The principal amount is due regardless of whether the borrower chooses to refinance or not.

Conclusion

The correct answer is B, as it accurately reflects the payment structure of an interest-only loan, where the principal is repaid as a balloon payment at the loan's end. Options A, C, and D do not correctly represent the repayment terms associated with interest-only loans, making them incorrect.