California Real Estate Practice Exam

During which situation would the balance of a mortgage loan actually increase while payments are being made?

1. Positive amortization

2. Negative amortization

3. Standard amortization

4. Fixed-rate amortization

The correct answer is: Negative amortization

The correct response is that a mortgage loan balance can increase during the period payments are made in the case of negative amortization. In this situation, the borrower’s payments are insufficient to cover the interest charges on the loan. As a result, the unpaid interest is added to the principal balance, leading to an overall increase in the loan amount over time. This typically occurs in loans with a deferred interest option where borrowers are not required to pay the full interest amount each period. In contrast, positive amortization refers to a situation where the loan balance decreases over time because the payments being made are sufficient to cover both interest and principal. Standard amortization and fixed-rate amortization both describe systematic payment structures meant to reduce the principal balance, rather than increase it. Therefore, within the context of this question, negative amortization correctly describes the scenario in which mortgage payments could lead to an increased loan balance.