The gradual repayment of a loan through regular payments that cover both principal and interest.
Why Amortization matters on the exam
This term belongs to Financing. The questions below are real items from Freehold's bank that use it - each one cites its source.
Exam questions using Amortization
Every Freehold question shows why the right answer is right — and cites its source.
A loan that requires periodic payments based on a longer amortization schedule but becomes due in full after a shorter term is called a:
Fully amortized loan
Interest-only loan
Partially amortized (balloon) loan
Negatively amortized loan
Show answer & explanation
Partially amortized (balloon) loan — A partially amortized loan calculates payments as if repaid over a long term but requires the remaining balance to be paid in a lump-sum balloon payment at an earlier maturity date.
Source: PSI National Real Estate Exam Content Outline §4 Financing
Negative amortization occurs when:
The monthly payment is less than the interest due, causing the loan balance to increase
The monthly payment exceeds the interest due, thereby reducing the principal balance faster
The borrower makes an extra principal-only payment
The lender waives the final balloon payment
Show answer & explanation
The monthly payment is less than the interest due, causing the loan balance to increase — Negative amortization happens when payments are insufficient to cover accruing interest, so unpaid interest is added to the principal balance, causing the debt to grow instead of shrink.
Source: PSI National Real Estate Exam Content Outline §4 Financing
A graduated payment mortgage (GPM) is structured so that:
Payments start high and decrease over time
The interest rate adjusts monthly based on an index
The loan balance is due in full after five years
Payments start low and gradually increase over a set period before leveling off
Show answer & explanation
Payments start low and gradually increase over a set period before leveling off — A graduated payment mortgage begins with lower payments that increase on a scheduled basis over the early years, which may cause some negative amortization initially, before payments level off for the remaining term.
Source: PSI National Real Estate Exam Content Outline §4 Financing
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