Final answer:
The correct option is 3. Lucy has a negative amortization home mortgage, which is a type of mortgage that allows for lower initial payments that do not cover the full interest, causing the balance to increase over time. This is different from zero-down, teaser-rate ARMs, or no documentation mortgages.
Step-by-step explanation:
Lucy's mortgage, where the initial monthly payments are less than the monthly interest charges, leading to an increasing mortgage balance, is known as a negative amortization home mortgage. This type of mortgage allows borrowers to make lower payments in the early years of the loan. However, this can be a risky proposition as the owed balance can grow over time instead of diminishing. Negative amortization can occur in certain adjustable-rate mortgages (ARMs), where the introductory payment is set below the interest rate for a period, leading to an increasing balance owed if the payments are not adjusted to cover the full amount of accrued interest.
In a zero-down home mortgage, borrowers can purchase a home with no down payment, which is different from having negative amortization. A teaser-rate ARM offers a low introductory interest rate that adjusts after a set period; it can potentially lead to negative amortization if payments after the teaser period are not enough to cover the full interest charges. A no documentation home mortgage does not require borrowers to provide as much financial information, but this term does not directly refer to negative amortization.
The correct option for a mortgage where initial payments are less than the monthly interest charges, causing the balance to increase, is option 3: negative amortization home mortgage.