Mortgage Loan Originator (MLO) Licensing Practice Test

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Prepare for the Mortgage Loan Originator (MLO) Licensing Test. Study with flashcards and multiple-choice questions, each with hints and explanations. Get ready to succeed on your exam!

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What feature distinguishes a balloon payment mortgage from other types of mortgages?

It requires monthly principal and interest payments
It is less than 5 years in maturity
It includes a lump sum payment at the end of the term
It has fluctuating interest rates

The correct answer is: It includes a lump sum payment at the end of the term

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.