Loan Officer Practice Exam

Which mortgage type is most likely to cause payment shock according to the Interagency Statement on Subprime Mortgage Lending?

1. Adjustable-rate mortgage

2. Jumbo mortgage

3. Fixed-rate mortgage

4. Construction mortgage

The correct answer is: Adjustable-rate mortgage

Payment shock refers to the drastic increase in monthly mortgage payments that can occur when an adjustable-rate mortgage (ARM) resets to a higher interest rate after an initial fixed-rate period. According to the Interagency Statement on Subprime Mortgage Lending, ARMs, particularly those with lower introductory rates, can lead to this situation as borrowers may not have anticipated the significant rise in payments when the rate adjusts upward. As ARMs often begin with a lower rate for a specified period before transitioning to a variable rate that can increase significantly, borrowers can experience payment shock if they are not prepared for the financial impact. This phenomenon is less likely with fixed-rate mortgages, which maintain the same payment amount over the life of the loan. Jumbo mortgages and construction mortgages do not inherently involve the same risks related to variable interest rates and payment adjustments that are characteristic of ARMs, which further distinguishes them from the potential for payment shock.