Florida Real Estate Broker ExaminationReal Estate Finance and InvestmentMedium
A Florida investor is considering a fixed-rate mortgage for a new commercial property. They are particularly interested in understanding how the principal portion of their monthly payments will change over the loan term. Which mortgage instrument characteristic directly describes this aspect of the loan?
- AAcceleration clause
- BAmortization
- CPrepayment penalty
- DEscrow account
Show answer & explanationAnswer & explanation
Correct answer: B. Amortization
Amortization is the process of paying off a debt over time through regular principal and interest payments. In an amortized loan, the principal portion of each payment gradually increases while the interest portion decreases over the loan term.
Why the other options are wrong
- A. An acceleration clause allows the lender to demand immediate repayment of the entire loan balance upon default.
- C. A prepayment penalty charges the borrower for paying off the loan early, not how principal payments change.
- D. An escrow account holds funds for property taxes and insurance, unrelated to how principal payments change.
Amortization
Amortization is the process of gradually paying off a debt over a period of time through regular, scheduled payments that include both principal and interest.
- Each payment reduces the principal balance.
- Early payments are mostly interest, later payments are mostly principal.
- Most mortgage loans are amortized.
Memory trick: Amortization means 'A'll the 'M'oney 'O'ver 'R'egular 'T'ime.