A loan requires monthly interest-only payments for five years and then begins fully amortizing. Which statement is accurate?
Correct Answer
A) The principal balance generally does not decline during the interest-only period unless extra principal is paid
Why this is correct: During an interest-only period, the scheduled payment is calculated to cover only the interest accruing each month. No portion of the scheduled payment is applied to principal reduction. Therefore, the principal balance remains unchanged unless the borrower makes additional, voluntary principal payments. Why the other choices are wrong: "The loan is fully repaid after five years" is wrong; after five years, the amortization period begins, and the original principal balance (or most of it) remains to be repaid. "Every interest-only payment reduces principal equally" is wrong; by definition, an interest-only payment reduces principal by $0 unless extra is paid. "The note rate must be zero during the first five years" is wrong; the note rate is positive, and the payment covers that interest. Exam tip: Interest-only = Principal balance stays flat. Amortization begins later.
Why This Is the Correct Answer
Why this is correct: During an interest-only period, the scheduled payment is calculated to cover only the interest accruing each month. No portion of the scheduled payment is applied to principal reduction. Therefore, the principal balance remains unchanged unless the borrower makes additional, voluntary principal payments. Why the other choices are wrong: "The loan is fully repaid after five years" is wrong; after five years, the amortization period begins, and the original principal balance (or most of it) remains to be repaid. "Every interest-only payment reduces principal equally" is wrong; by definition, an interest-only payment reduces principal by $0 unless extra is paid. "The note rate must be zero during the first five years" is wrong; the note rate is positive, and the payment covers that interest. Exam tip: Interest-only = Principal balance stays flat. Amortization begins later.
More Mortgage Knowledge Questions
A subordinate-lien home equity loan closes at an APR of 9.4% when the average prime offer rate for a comparable transaction is 6.1%.
In a closing-readiness check, a risk reviewer sees facts tied to TILA Truth in Advertising. What should the file reflect?
In a training scenario, a trainee asks which official source controls FHA single-family origination policy. What action best follows the rule?
A compliance analyst compares the file facts with LTV Ratio Calculation during a licensing team review. Which conclusion is accurate?
A branch manager asks about a loan file because a trainee asks which official source controls FHA single-family origination policy. What should happen?
The loan team compares the file facts with ARM Cap Structures during a borrower follow-up call. Which conclusion is accurate?
A borrower has a 30-year fixed-rate mortgage with monthly principal and interest of $1,450. Property taxes increase, and taxes are paid through escrow. What can happen to the total monthly payment?
A loan has an outstanding principal balance of $240,000 and a 6% annual interest rate. Using simple monthly accrual, how much interest accrues for one month?
An annual escrow analysis projects a $780 shortage. The borrower asks how it will be collected.
What does an amortization schedule show for each scheduled payment?
People Also Study
Federal Mortgage-Related Laws
24% of exam
Mortgage Loan Origination Activities
27% of exam
Ethics, Fraud & Consumer Protection
18% of exam
Uniform State Test Content
11% of exam