Massachusetts Real Estate License Practice Test

Which of the following mortgages typically includes monthly payments that pay off the principal sum by the maturity date?

1. Direct Deduction Mortgage

2. Adjustable Rate Mortgage

3. Balloon Mortgage

4. Interest-Only Mortgage

The correct answer is: Direct Deduction Mortgage

The correct answer is the Direct Deduction Mortgage. This type of mortgage is structured to ensure that the monthly payments made by the borrower contribute to both the interest and the principal, allowing the borrower to fully pay off the loan by the maturity date. This means that the borrower begins paying down the balance right from the outset, making it a common option for those looking to ensure full repayment in a specified timeframe. In contrast, Adjustable Rate Mortgages may have fluctuating payments based on interest rate changes, and may not always ensure the principal is paid off by maturity without specific terms. Balloon Mortgages typically involve lower payments during the initial period, with a large final payment due at the end, which does not guarantee that the principal is fully amortized by the end of the term. Interest-Only Mortgages allow borrowers to pay only interest for a set period, meaning the principal balance remains unchanged until the principal payments begin. Each of these alternatives has characteristics that prevent them from guaranteeing full repayment of the principal by the maturity date in the same way a Direct Deduction Mortgage does.