Which of the following is a risk associated with a non-traditional ARM loan?

• A. the inclusion of a prepayment penalty
• B. payment shock when amortizing begins
• C. additional costs associated with reduced document loans
• D. all of the above

Answer: (D)

Non-traditional ARM loans carry several risks that borrowers should understand. A prepayment penalty can make paying off the loan early costly, which reduces your flexibility to refinance if better rates become available. Payment shock is another concern: after the initial period or when the rate adjusts, monthly payments can rise sharply, potentially stressing monthly budgets. Reduced-document loans come with higher risk and often higher costs or fees, since income and asset verification is weaker. Because each of these factors can be linked to non-traditional ARM loans, all of the above represents the risks involved.