What happens when there is deferred interest in a mortgage?

What happens when there is deferred interest in a mortgage?

• A. The unpaid interest is waived
• B. The unpaid interest is added to the loan balance
• C. The interest rate is reduced
• D. The interest is paid in full at closing

Answer: (B)

When there is deferred interest in a mortgage, the unpaid interest is added to the loan balance. This means that instead of the borrower paying the interest as it accrues, the interest is accumulated and rolled into the overall amount owed on the mortgage. This approach is often found in certain loan structures, such as deferred payment loans or some types of adjustable-rate mortgages, where borrowers may initially pay only principal without covering the interest costs. As a result, the balance of the loan grows larger than the original amount borrowed, which can lead to larger payments in the future. This practice is typically used in scenarios where the borrower might have cash flow difficulties initially but expects to have better financial circumstances later. Understanding this mechanism is crucial for borrowers, as it affects their long-term financial planning and the overall cost of the loan.

When there is deferred interest in a mortgage, the unpaid interest is added to the loan balance. This means that instead of the borrower paying the interest as it accrues, the interest is accumulated and rolled into the overall amount owed on the mortgage. This approach is often found in certain loan structures, such as deferred payment loans or some types of adjustable-rate mortgages, where borrowers may initially pay only principal without covering the interest costs.

As a result, the balance of the loan grows larger than the original amount borrowed, which can lead to larger payments in the future. This practice is typically used in scenarios where the borrower might have cash flow difficulties initially but expects to have better financial circumstances later.

Understanding this mechanism is crucial for borrowers, as it affects their long-term financial planning and the overall cost of the loan.