Humber/Ontario Real Estate Course 3 Exam Practice

What defines a fully-amortized loan?

1. The amortization period is no longer than 20 years.

2. Payments repay the loan in full by its maturity date.

3. Mortgage payments must be made monthly.

4. The amortization period is longer than the term.

5. The loan must include balloon payments.

6. Interest rates are adjusted annually.

The correct answer is: The amortization period is longer than the term.

A fully-amortized loan is characterized by payments that are structured to completely pay off the loan balance by its maturity date. This means that at the end of the loan term, the borrower will have paid off both the principal and interest owed, leaving a zero balance. While some options mention characteristics that might be associated with various types of loans, such as amortization periods or payment frequencies, they do not accurately define a fully-amortized loan. The defining feature is that the loan reaches a zero balance when all payments have been made according to the agreed schedule. For instance, it isn’t necessary for the amortization period to be longer than the term, nor is it a requirement for mortgage payments to be made on a monthly basis for the loan to be considered fully amortized. Furthermore, balloon payments and annual interest rate adjustments are features seen in specific loan structures but are not relevant to the definition of a fully-amortized loan. Thus, the key concept is that the structure of payments ensures that the loan balance is fully paid by the maturity date, which is the defining aspect of a fully-amortized loan.