Mortgage Loan Originator (MLO) Licensing Practice Test

What term describes a short-term mortgage where only interest payments are made during the loan term?

1. Fully amortized loan

2. Conventional mortgage

3. Balloon payment mortgage

4. Interest-only mortgage

The correct answer is: Balloon payment mortgage

The correct term for a short-term mortgage where only interest payments are made during the loan term is an interest-only mortgage. In this type of mortgage, the borrower pays only the interest on the loan for a specified period, typically allowing for lower initial monthly payments. At the end of the interest-only period, the borrower will either pay off the principal balance in a lump sum or begin making payments that include both principal and interest. This structure provides certain benefits, such as increased cash flow for the borrower during the initial period. However, it's essential to understand that once the interest-only period ends, the remaining principal becomes due, which can result in significantly higher payments or a large final balloon payment. Other options do not fit the description. A fully amortized loan involves making both principal and interest payments throughout the loan term, ensuring that the loan is repaid in full by the end of the term. A conventional mortgage is a broader category that refers to loans not insured by the government and can be amortized or interest-only, but it doesn't specifically address the short-term, interest-only aspect. A balloon payment mortgage includes regular payments that do not cover the loan entirely, requiring a large final payment to settle the remaining balance, but it is not strictly interest