Certified Apartment Portfolio Supervisor (CAPS) Practice Exam - Module 2

What distinguishes a Balloon mortgage?

1. It requires equal monthly payments throughout

2. It has a fixed rate with a large final payment

3. It is used solely for refinancing

4. It allows payments to be spread over a longer term

The correct answer is: It has a fixed rate with a large final payment

A balloon mortgage is characterized by its structure, where the borrower makes relatively small periodic payments over the mortgage term, followed by a significant final payment, known as the balloon payment. This large final payment typically consists of the remaining balance of the loan, which can be substantially higher than the preceding payments. In the context of the options, the correct choice accurately reflects this unique design of a balloon mortgage. While other types of mortgages often involve equal monthly payments or are spread over longer terms with consistent payments, the balloon mortgage stands out due to its final large payout requirement. The other options do not capture the essence of a balloon mortgage. For instance, consistent monthly payments throughout imply a more traditional mortgage structure, and mentioning that a balloon mortgage is solely used for refinancing overlooks its versatility in various financial situations. Additionally, the idea of allowing payments to be spread over a longer term does not apply since the structure inherently leads to a larger lump sum due at the end rather than distributed evenly over an extended period.