Nationwide Mortgage Licensing System (NMLS) Practice Exam

What type of mortgage has payments made in smaller increments but results in a larger mortgage balance over time?

1. Balloon mortgage

2. Reverse mortgage

3. Fixed-rate mortgage

4. Adjustable-rate mortgage

The correct answer is: Reverse mortgage

A reverse mortgage is designed specifically for homeowners, typically seniors, to convert a portion of their home equity into cash without having to sell the home or make monthly mortgage payments. Instead of making payments to reduce the loan balance, the interest on the loan accumulates over time, resulting in an increasing mortgage balance. This arrangement allows borrowers to access funds for retirement expenses or other needs while still living in their home. This type of mortgage is advantageous for those who require supplemental income and have limited cash flow, but it does mean that the amount owed will grow as time passes, essentially decreasing the equity in the home. Therefore, as payments are not made in the traditional sense, this can lead to a situation where the amount owed can exceed the initial value of the mortgage, especially in a rising property value market. Other types of mortgages, such as balloon, fixed-rate, and adjustable-rate mortgages, generally involve structured payments where the principal balance is reduced or adjusted according to the interest accrued, maintaining or lowering the overall loan balance over time.