Which of the following mortgage types has the most default risk, assuming all other loan terms are identical?

Interest-only loans carry the most default risk among the mortgage types listed because they allow borrowers to pay only the interest for a specified period, typically without reducing the principal balance. This means that while the borrower's monthly payments might initially be lower, they do not build equity in the property during the interest-only period.

As time passes and the loan matures, the borrower will eventually have to start paying back the principal, often leading to significantly higher monthly payments. This can be especially challenging for borrowers if their financial situation changes or if property values decrease, as they may find themselves unable to meet those increased payment demands. Additionally, because they are not paying down the principal, borrowers are at a higher risk of owing more than the property is worth if market conditions aren't favorable.

In contrast, fixed-rate loans, fully amortizing loans, and balloon loans have characteristics that typically mitigate default risk through gradual equity building or clearly defined payment structures. Understanding the dynamics of these various loan types is essential for assessing potential risks in real estate financing.