Final answer:
Jamal's mortgage with a low initial interest rate that will increase later is known as a teaser-rate ARM (adjustable-rate mortgage).
This type of loan starts with a low interest rate but can adjust to much higher rates, potentially leading to financial distress for the homeowner.
Step-by-step explanation:
Jamal has a mortgage with an extremely low initial interest rate that will increase dramatically in a few years. This type of mortgage is known as a teaser-rate ARM (adjustable-rate mortgage).
A teaser-rate ARM is a loan used to purchase a home where the initial rate is often attractively low for an introductory period, but after that, the interest rate can adjust to higher levels, often based on market interest rates or an index rate. This can sharply increase the monthly payments for the homeowner, sometimes making the loan unmanageable.
Other homeowners have faced similar challenges with their adjustable-rate mortgages, initially enticed by low introductory rates that later jumped significantly.
For example, the interest part of a monthly mortgage payment for a $250,000 home might jump from $833 at 4 percent to $1,458 at 7 percent,
putting the homeowner at a higher risk of defaulting on the loan. Banks that had purchased these risky loans did so hoping to claim the property if the homeowner defaulted but were left with devalued real estate instead.