What Is Amortization in Real Estate?

Every amortization question, answered

Every question above with its correct answer and the reasoning behind it. Read the explanations for the ones you answered correctly too. A lucky guess and knowing the rule look identical on a score report. These are sample questions from our larger bank.

1. 1. Under the federal Homeowners Protection Act, PMI on an eligible loan must terminate automatically when the balance reaches what share of the original value, using the original amortization schedule?

   • A62%
   • B75%
   • C78%correct
   • D80%

   Why: 78% is the automatic termination point, while 80% is the level at which the borrower may request cancellation. The distinction matters: one happens on its own, the other only if the borrower asks.

   Financing

2. 2. Negative amortization occurs when:

   • AThe scheduled payment is less than the accruing interest, so the balance growscorrect
   • BThe borrower voluntarily pays extra principal each month
   • CThe lender lowers the interest rate at an adjustment date
   • DThe loan is paid off ahead of its scheduled maturity

   Why: When the payment does not cover the interest, the shortfall is added to principal and the debt increases — the borrower loses equity while paying. Qualified mortgage rules discourage this feature for exactly that reason.

   Financing

3. 3. An eligible borrower is current, but principal has not reached 78% of original value when the loan reaches its original amortization midpoint. What additional federal PMI termination rule applies?

   • ATermination the month after the midpoint, even without reaching the 78% thresholdcorrect
   • BPMI necessarily continues for life
   • COnly the property's current listing price controls
   • DTermination is barred whenever a balloon exists

   Why: The midpoint rule is a separate backstop for eligible loans. It can matter for structures with slow principal reduction, provided payments are current.

   Financing

4. 4. A note requires level monthly payments computed on a 30-year schedule, with the entire remaining balance due at the end of year seven. This loan is:

   • APartially amortized with a balloon paymentcorrect
   • BA growing-equity mortgage
   • CA fully amortized loan
   • DA straight (term) loan calling for interest only

   Why: Partial amortization means the payments reduce principal but do not retire it, leaving a balloon at maturity. A straight loan pays interest only with all principal at the end, and a fully amortized loan ends at a zero balance.

   Financing

5. 5. A fully amortized loan is one in which:

   • AOnly interest is paid until the principal comes due at maturity
   • BThe last scheduled payment reduces the balance to zerocorrect
   • CA balloon payment retires the balance left at maturity
   • DThe payment amount changes every month as interest declines

   Why: Full amortization means the scheduled payments retire both interest and principal, ending at a zero balance with no balloon. Paying interest only until maturity describes a straight or term loan.

   Financing

6. 6. An ordinance gives owners of nonconforming billboards five years to remove them and pays nothing for the removal. This technique is called:

   • AInverse condemnation
   • BDedication
   • CDownzoning
   • DAmortizationcorrect

   Why: Amortization phases out a nonconforming use over a stated period, treating the time allowed as the compensation for the eventual loss. Inverse condemnation is the reverse situation, where an owner sues because regulation went too far.

   Land use controls