California Real Estate Practice Exam

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Which type of mortgage loan typically results in negative amortization?

Fixed-rate mortgage
Adjustable-rate mortgage
Graduated payment
Interest-only loan

The correct answer is: Graduated payment

A graduated payment mortgage loan is a type of loan where the initial payments are lower than the full monthly payment, but will gradually increase over time. This type of loan can result in negative amortization because the initial lower payments may not cover the full interest, causing the unpaid interest to be added onto the principal balance, ultimately resulting in a higher amount owed. This type of loan is different from a fixed-rate mortgage, where the payments stay the same throughout the entire loan, and an adjustable-rate mortgage, where the interest rate can change over time. An interest-only loan also typically has fixed payments, but the borrower only pays the interest each month, not the principal, which can also result in negative amortization over time if the loan is not paid off in full.