### What is a Step-Rate Mortgage? - [ ] A mortgage with a fixed interest rate for the life of the loan - [x] A mortgage where the interest rate increases after set periods during the loan term - [ ] A mortgage that only lowers in interest rate over its term - [ ] A mortgage specifically designed for first-time homebuyers > **Explanation:** A Step-Rate Mortgage is a type of adjustable-rate mortgage where the interest rate periodically increases after specified time periods. This could be set at an initial lower rate for a period, making it more affordable initially, but after a set period, the rate steps up, often aligning with the current market rates. ### Why might borrowers choose a Step-Rate Mortgage? - [ ] They believe the interest rates will always remain high - [x] They believe they will be able to refinance the loan before the rate increases - [ ] They want a very high starting interest rate - [ ] They are looking for short-term investment opportunities > **Explanation:** Borrowers typically take on Step-Rate Mortgages because they expect to refinance their loans before the interest rate increases. This strategy is used to initially benefit from lower rates and avoid higher payments as the rate steps up. ### What motivates lenders to offer Step-Rate Mortgages? - [x] They believe interest rates will increase in the future - [ ] They aim to provide loans only to first-time homebuyers - [ ] They want to lock in a lower long-term interest rate for borrowers - [ ] They only deal with luxury properties > **Explanation:** Lenders offer Step-Rate Mortgages because they anticipate that interest rates will rise in the future. By offering these loans, lenders can ensure they won't be locked into providing low rates when market rates have risen eventually. ### In Step-Rate Mortgages, what typically happens to the interest rate after the initial period? - [ ] It remains fixed for the rest of the mortgage - [ ] It decreases - [ ] It is eliminated - [x] It adjusts to the prevailing market rate > **Explanation:** In Step-Rate Mortgages, after the initial period where the borrower enjoys a lower introductory rate, the interest rate adjusts to align with the prevailing market rate. This increase can result in significantly higher payments. ### In what scenario might a borrower find a Step-Rate Mortgage less favorable? - [ ] If interest rates are expected to fall in the future - [x] If they are unable to refinance before the rate increase - [ ] If they are purchasing only investment properties - [ ] If they have a very high credit score > **Explanation:** A Step-Rate Mortgage becomes less favorable if a borrower cannot refinance before the interest rate steps up. The higher rates following the initial period can lead to significantly increased monthly payments, potentially becoming unaffordable. ### When are Step-Rate Mortgages ideal for borrowers? - [ ] When interest rates are expected to fall significantly - [ ] When borrowers want a fixed-rate mortgage for stability - [x] When borrowers can sell or refinance prior to the rate increase - [ ] When financing commercial properties > **Explanation:** Step-Rate Mortgages are ideal for borrowers who can sell their property or refinance the mortgage before the rate increase. This allows them to benefit from the lower initial rates without being affected by the future increased rates. ### What does a lender and borrower typically agree upon in a Step-Rate Mortgage after the initial period? - [ ] To keep the same interest rate - [x] To adjust the interest rate consistent with the market - [ ] To eliminate any interest rate - [ ] To convert to a fixed-rate mortgage > **Explanation:** After the initial period, the lender and borrower in a Step-Rate Mortgage typically agree to adjust the interest rate to a level consistent with the prevailing market rates at that time. This can result in an increase from the initially lower rate of the mortgage. ### What feature of Step-Rate Mortgages distinguishes them from fixed-rate mortgages? - [ ] A stable interest rate for the life of the loan - [x] Periodic increases in the interest rate - [ ] No yearly interest rates - [ ] Permanent low interest rates > **Explanation:** The distinguishing feature of Step-Rate Mortgages compared to fixed-rate mortgages is the periodic increases in the interest rate. Fixed-rate mortgages maintain a consistent interest rate throughout the loan term, whereas Step-Rate Mortgages have predefined intervals where the rates rise. ### What risk is associated with Step-Rate Mortgages? - [ ] Mortgage insurance premiums - [ ] No alteration in interest amounts - [x] Higher monthly payments after interest rate adjustments - [ ] Always higher initial interest rates > **Explanation:** The primary risk associated with Step-Rate Mortgages is the potential for higher monthly payments after the interest rate adjusts. Once the initial lower rate period ends, the stepped-up rates can lead to increased financial burdens for the borrower. ### What is a potential benefit of choosing a Step-Rate Mortgage? - [x] Lower initial interest rates - [ ] No property taxes - [ ] Lower closing costs - [ ] Permanent fixed interest rates > **Explanation:** One of the potential benefits of a Step-Rate Mortgage is the lower initial interest rates, which make monthly payments more affordable during the initial period. This can be financially advantageous for borrowers who understand the future risks and plan accordingly.