Final answer:
The incorrect statement about (C) interest-only mortgages is that they allow the borrower to pay only interest for the entire life of the mortgage. It's generally better for borrowers when mortgage rates are lower than inflation and better for banks when rates are higher than inflation. If inflation falls, homeowners with an adjustable-rate mortgage may see their payments decrease.
Step-by-step explanation:
When assessing the statement about interest-only mortgages, it's important to note that such a mortgage allows the borrower to pay only the interest for an initial period, typically 5 to 10 years, not for the entire life of the mortgage. Here's the breakdown of the statements:
- Mortgage payments are more affordable during the interest-only period since no principal is being paid down.
- Mortgage payments may increase abruptly after the initial interest-only period when the borrower begins to pay down the principal.
- Interest-only mortgages do not allow the borrower to pay only interest for the life of the mortgage; this is the incorrect statement.
- Interest-only mortgages have indeed become more popular in certain economic conditions, such as when home prices are rising rapidly or when borrowers expect to sell or refinance before the interest-only period ends.
In relation to mortgage rates and inflation, it would typically be more advantageous for a borrower when mortgage interest rates are low relative to inflation. Conversely, it's usually better for the bank to lend money when the interest rates are higher than inflation, ensuring a better return on the loan.
If inflation falls unexpectedly, a homeowner with an adjustable-rate mortgage might experience a decrease in their mortgage payments, as these rates often track the market interest rates which can be influenced by levels of inflation.
Paying off debt faster than the minimum required, especially in the case of a mortgage, can result in significant savings on the interest charged over the life of the loan.