West Virginia Mortgage Law Practice Test

A mortgage loan may feature which of the following?

1. A balloon payment

2. An adjustable interest rate

3. An interest-only period

4. A prepayment penalty

The correct answer is: A balloon payment

A mortgage loan can indeed feature a balloon payment, which is a significant final payment due at the end of a loan term. These types of loans typically require smaller monthly payments throughout the term, with the balance of the loan paid off in a single lump sum at the end. This structure can be appealing to borrowers who expect to refinance or sell the property before the balloon payment is due, but it also comes with the risk of needing a large sum when that payment is finally due. The other options, while they can also be features of a mortgage, are not exclusive to mortgages; rather, they represent different potential structures or terms that might be present across various mortgage agreements. An adjustable interest rate adjusts over time based on market conditions, an interest-only period allows borrowers to pay only interest for a certain time without reducing principal, and a prepayment penalty imposes a fee if the borrower pays off the loan early. Each of these features can apply to specific mortgage products but does not encompass the core characteristic of what can define a mortgage loan in the same way a balloon payment does.