National Real Estate Practice Exam

Which type of mortgage requires the borrower to repay the loan with regular payments that cover both principal and interest?

1. Interest-only mortgage

2. Amortized mortgage

3. Negative amortization mortgage

4. Balloon mortgage

The correct answer is: Amortized mortgage

An amortized mortgage is characterized by regular payments that cover both the principal and interest, which means that the loan is gradually paid off over time. This type of mortgage divides each payment into two parts: one portion goes toward the interest accrued on the loan, while the other portion reduces the principal balance. Consequently, with each payment made, the borrower not only makes progress toward paying off the debt but also reduces the total interest owed in subsequent payments. In contrast, an interest-only mortgage requires the borrower to pay only the interest for a certain period, with no reduction in principal until the end of the term. A negative amortization mortgage allows the balance of the loan to increase even as payments are made, meaning the borrower pays less than the accruing interest. Finally, a balloon mortgage typically involves making small payments over a set period, with a large final payment required to pay off the remaining balance. Thus, the structure of an amortized mortgage is distinct because it enables borrowers to systematically reduce their debt through consistent, balanced payments.