Nationwide Mortgage Licensing System (NMLS) Practice Exam

Which of the following is a negatively amortizing loan?

1. Reverse mortgage

2. Balloon mortgage

3. Term mortgage

4. Wrap mortgage

The correct answer is: Reverse mortgage

A reverse mortgage is a type of loan that is designed specifically for homeowners aged 62 and older, allowing them to convert part of the equity in their home into cash. In a reverse mortgage, the lender makes payments to the borrower based on the equity in their home, which means that the loan balance increases over time as interest accrues and is added to the principal balance. This results in negative amortization, where the amount owed on the loan grows rather than shrinks. In contrast, other loan types such as a balloon mortgage typically involves lower initial payments that increase significantly at the end of the loan term. A term mortgage generally involves a standard amortization process where payments are made that reduce the principal over time, and a wrap mortgage involves a junior mortgage that wraps around an existing mortgage, usually with structured payments to the original lender. None of these options result in the decreasing equity or increasing balance characteristic of negative amortization that is highlighted in a reverse mortgage scenario.