Loan Officer Practice Exam

Which type of mortgage is characterized by a predetermined maximum loan amount and interest-only payments?

1. Home equity loan

2. Reverse mortgage

3. Home equity line of credit

4. Purchase money mortgage

The correct answer is: Home equity line of credit

The correct answer is the home equity line of credit (HELOC). A HELOC is a type of mortgage that allows homeowners to borrow against the equity in their homes, up to a predetermined maximum loan amount. One of the defining features of a HELOC is that it often requires interest-only payments during the draw period, which is the time frame in which the borrower can access the funds. This structure allows for flexibility in borrowing as the homeowner can draw on the line of credit as needed, only paying interest on the amount they have actually borrowed. In contrast, a home equity loan provides a lump sum that is repaid over a fixed term with regular principal and interest payments, rather than just interest. A reverse mortgage, primarily designed for seniors, allows them to access home equity without requiring repayment until the homeowner moves or passes away, and does not involve interest-only payments. A purchase money mortgage is specifically used to buy real estate and requires the borrower to pay both principal and interest from the outset. Each of these alternatives serves different purposes, highlighting how a HELOC uniquely fits the characteristics described in the question.