Final answer:
The given statement "A balloon payment mortgage starts with higher payments, which decrease as the mortgage is paid off" is false because a balloon payment mortgage typically involves lower initial payments followed by a large lump sum, the "balloon payment," due at the end of the loan term. So, the correct option is b. False.
Explanation:
A balloon payment mortgage typically involves lower initial payments followed by a large lump sum, the "balloon payment," due at the end of the loan term. This structure may give the illusion of decreasing payments, but in reality, it results in a substantial final payment after the initial lower payments.
A balloon payment mortgage operates by allowing borrowers to make smaller monthly payments initially, often covering only the interest or a fraction of the principal. However, unlike a traditional mortgage where payments contribute to both interest and principal, a balloon mortgage's lower initial payments don't reduce the principal significantly. This leads to a substantial remaining balance, culminating in a balloon payment at the end of the loan term.
While the lower initial payments might seem appealing, borrowers should be aware of the significant final payment due. This type of mortgage might suit those planning to sell or refinance before the balloon payment is due, but it carries the risk of being unable to make the substantial final payment if circumstances change.
In summary, contrary to the claim, a balloon payment mortgage doesn’t follow a decreasing payment structure throughout the term. Instead, it involves smaller initial payments with a substantial final payment at the end, making it crucial for borrowers to understand and plan for the balloon payment scenario.
So, the correct option is b. False.