Mortgage Loan Originator (MLO) Licensing Practice Test

A balloon payment mortgage is characterized by its requirement of a significant lump sum payment at the end of the loan term. This distinguishes it from other mortgage types, which typically involve consistent monthly payments of both principal and interest that fully amortize the loan over its term.

In a balloon mortgage, borrowers may make smaller monthly payments that cover only interest or a portion of the principal for a defined period, usually ranging from 5 to 7 years. At the end of this period, the borrower must make a large final payment, known as the balloon payment, which pays off the remaining balance of the loan. This structure can make monthly payments more affordable initially, but it also poses a significant financial obligation when the balloon payment comes due.

The other attributes listed, such as requiring monthly principal and interest payments, having a maturity less than 5 years, or having fluctuating interest rates, are not unique identifiers of balloon payment mortgages. Instead, they might apply to other types of loans or mortgage structures, making the lump sum payment at the end the defining feature of balloon payment mortgages.