Nationwide Mortgage Licensing System (NMLS) Practice Exam

What is the common purpose of an acceleration clause in a mortgage agreement?

1. To alter the interest rate

2. To compel immediate repayment

3. To provide a refinance option

4. To allow for payment holidays

The correct answer is: To compel immediate repayment

An acceleration clause in a mortgage agreement serves the important purpose of compelling immediate repayment of the outstanding balance under certain conditions, typically in the event of a default. When a borrower fails to adhere to the terms of the mortgage—such as missing payments or breaching other obligations—the lender can invoke this clause, which enables them to demand that the full amount owed is paid immediately instead of continuing with the previously agreed-upon payment schedule. This clause acts as a protective mechanism for lenders, ensuring that they can recover their funds more quickly in the case of potential loss. It also adds an additional incentive for borrowers to maintain compliance with the loan terms to avoid facing immediate repayment demands. Understanding this function of the acceleration clause is crucial for those involved in mortgage agreements, as it highlights the risk involved for borrowers and the rights of lenders in safeguarding their investments.