Mortgage Loan Originator (MLO) Licensing Practice Test

What does payment shock primarily refer to?

1. An increase in down payment amount

2. Decrease in housing expenses

3. Significant increase in proposed housing expense

4. Lack of sufficient income to cover mortgage

The correct answer is: Significant increase in proposed housing expense

Payment shock primarily refers to a significant increase in proposed housing expense that a borrower may experience when transitioning from one mortgage payment to another, particularly when moving to a more expensive home or adjusting from an interest-only or temporary adjustable-rate mortgage to a standard fixed-rate mortgage. This situation can occur when, for example, a borrower has been paying a low introductory rate or only interest for a certain period and then faces a considerable jump in monthly payments once the loan adjusts or the period ends. Such a scenario can make it difficult for borrowers to adjust their budgets accordingly, potentially leading to financial strain. The other options, while related to aspects of mortgage financing, do not encapsulate the concept of payment shock. For instance, an increase in the down payment amount, a decrease in housing expenses, or insufficient income to cover the mortgage, while significant issues, do not address the abrupt change in monthly payment amounts that characterize payment shock. This financial adjustment can often be overwhelming, especially for those who may not have planned for such increases in their future housing costs.