Fixed, Adjustable, Balloon and Other New York Mortgage Types

For the New York salesperson exam, use four separate questions: Is the rate fixed or adjustable? Are payments level or scheduled to change? Does principal amortize? Is a large balance due at maturity? One loan can combine several features.

What is the fastest comparison of the five mortgage types?

The table describes common exam patterns, not every loan in the market. The note, rider, Loan Estimate and Closing Disclosure control a specific transaction.

Official source map

The New York State Department of State Real Estate Salesperson 77-Hour Curriculum places fixed-rate, adjustable-rate, balloon and graduated-payment loans in Subject 5, Real Estate Finance. Its key terms also include amortization, negative amortization, margin, rate cap, payment cap, lifetime cap or ceiling and straight mortgage or term mortgage.

The Consumer Financial Protection Bureau, or CFPB, explains the fixed-rate and adjustable-rate distinction. It states that a fixed rate is set when the loan is made and does not change, while an ARM rate can rise or fall. Its index and margin guide and rate-cap guide explain how later ARM rates are constructed and limited.

Current Regulation Z section 1026.37 controls the terminology on the Loan Estimate for covered transactions. It distinguishes Adjustable Rate, Step Rate and Fixed Rate products, and separately identifies Negative Amortization, Interest Only, Step Payment and Balloon Payment features. For that disclosure, a balloon payment is more than twice a regular periodic payment, with special treatment for transactions that require only one or two payments.

Current Regulation Z section 1026.19(b) addresses early adjustable-rate program disclosures. Regulation Z section 1026.20(c) and (d) addresses notices before covered ARM payment changes. Regulation Z section 1026.43 provides ability-to-repay rules and official examples involving fixed-rate, interest-only, adjustable-rate, graduated-payment and balloon loans.

The CFPB mortgage key-terms resource explains amortization, negative amortization and balloon balances in consumer language. The United States Department of Housing and Urban Development, or HUD, handbook archive documents Section 245 graduated-payment mortgages, including scheduled payment increases and negative-amortization mechanics. The archived program material supports the payment concept but does not establish that a particular Section 245 product is currently offered by a lender.

The Federal Reserve Bank of New York publishes the Secured Overnight Financing Rate, or SOFR, along with SOFR averages and an index. SOFR is one possible reference concept in modern ARM documents, but students should use the index named in the question or note rather than assume every ARM uses the same index.

What is the exam testing?

You should be able to:

• distinguish a loan's interest-rate structure from its payment and amortization structure;
• define fixed-rate and adjustable-rate mortgages;
• identify the index, margin and fully indexed rate in an ARM;
• distinguish an initial adjustment cap, subsequent adjustment cap and lifetime cap;
• distinguish a rate cap from a payment cap;
• interpret common ARM notation from the facts supplied;
• recognize that a fixed rate does not freeze taxes, insurance or the total housing payment;
• distinguish a fully amortizing loan from partial amortization;
• identify a balloon payment and maturity risk;
• distinguish a scheduled balloon from acceleration after default;
• explain the licensing meaning of straight or term mortgage;
• distinguish a full-term straight mortgage from a temporary interest-only feature;
• explain a graduated-payment schedule;
• calculate simple negative amortization;
• distinguish a graduated-payment mortgage from a growing-equity mortgage;
• recognize that one loan can be fixed-rate, interest-only and balloon at the same time;
• locate major product features on federal disclosures;
• avoid promising that a borrower can refinance or sell before a payment change.

This article teaches the structure and decision rules. It does not claim a published state-exam question count or subject weighting.

Why are mortgage labels easy to confuse?

Because the labels answer different questions.

A loan can be described by at least four independent dimensions:

1. Rate: fixed, adjustable or step rate.
2. Payment: level, interest-only, graduated, seasonal or otherwise scheduled.
3. Amortization: fully amortizing, partially amortizing or negatively amortizing.
4. Maturity: paid to zero through regular payments or ending with a balloon.

Consider a seven-year commercial mortgage with a fixed 6 percent rate, monthly payments calculated over 25 years and the remaining balance due in year seven. It is:

• fixed-rate;
• level-payment during the term;
• partially amortizing;
• balloon at maturity.

Calling it only a fixed-rate loan hides the maturity risk. Calling it only a balloon loan hides the stable rate. The complete classification uses both labels.

What is amortization?

Amortization is the process of reducing a debt through scheduled payments over time. A payment commonly covers accrued interest first, with the scheduled remainder applied to principal.

In a fully amortizing loan:

• each scheduled payment follows the contract formula;
• the principal balance generally declines;
• the final scheduled payment retires the remaining balance, subject to ordinary rounding or adjustments;
• no large unpaid principal balance is planned for maturity.

Amortization period and loan term can be equal or different:

• 30-year term, 30-year amortization: fully amortizing over 30 years;
• 7-year term, 30-year amortization: partially amortizing, with a balloon after 7 years;
• 5-year term, interest-only: no scheduled principal amortization during the term, with principal due at maturity.

The amortization glossary page gives the compact definition. The decision rule is simple: compare how long the payment calculation assumes with when the debt actually matures.

How does a level-payment fixed-rate mortgage work?

A fixed-rate mortgage uses an interest rate that does not change under the loan contract. In the familiar fully amortizing version, scheduled principal and interest, or P&I, stay level through the term.

The allocation inside that level payment changes:

• early in the schedule, interest is higher because the outstanding principal is higher;
• the remaining scheduled amount reduces principal;
• as principal declines, monthly interest declines;
• more of the same payment then reaches principal;
• the balance reaches zero at the scheduled maturity.

The rate is fixed. The interest dollars within each payment are not fixed because they are calculated against a changing balance.

Does fixed rate mean the total monthly payment cannot change?

No. Fixed rate ordinarily stabilizes the note rate and scheduled P&I. Real property taxes, homeowners insurance, mortgage insurance and escrow adjustments can change the amount sent to the servicer.

The PITI and mortgage escrow guide separates those components. For this article, keep the labels precise:

Fixed rate means the contract interest rate is fixed. It does not mean every ownership expense is fixed.

What is a fixed-rate amortization example?

Assume a $300,000 loan, a fixed annual rate of 6 percent and a 30-year fully amortizing schedule. The scheduled monthly P&I is about $1,798.65.

For the first month, using the simplified monthly-rate method:

Monthly rate = 6% ÷ 12 = 0.5%

First-month interest = $300,000 × 0.5% = $1,500

First-month principal = $1,798.65 − $1,500 = $298.65

After that scheduled application, the balance is about $299,701.35. The next month's interest is calculated on that lower balance, so slightly more of the level payment reaches principal.

This example excludes taxes, insurance, daily-interest conventions, fees and rounding beyond cents.

What is an adjustable-rate mortgage?

An adjustable-rate mortgage, or ARM, permits the interest rate to change after consummation under the note's formula. A typical formula uses:

Index + margin = fully indexed rate, subject to caps and any floor

The index is an external measure that moves with market conditions. The margin is the number of percentage points the lender adds under the loan agreement. The margin commonly stays constant after closing even though the index moves.

The resulting contract rate can be limited by:

• an initial adjustment cap;
• a subsequent adjustment cap;
• a lifetime cap;
• a floor;
• other note terms.

The payment is then recalculated under the note's rate, remaining balance and remaining amortization term, unless another payment feature changes the result.

What is a hybrid ARM?

A hybrid ARM begins with a fixed-rate period and then adjusts. The notation must be read with the product's stated convention.

Common examples include:

• 5/1 ARM: fixed for five years, then adjusts once each year;
• 7/1 ARM: fixed for seven years, then adjusts once each year;
• 5/6 ARM: fixed for five years, then adjusts every six months.

The first number commonly states the length of the initial fixed period in years. The second can state the adjustment interval in years or months, depending on how the product is written. Do not convert a 5/6 ARM into a loan that adjusts every six years. Read the disclosure.

The Loan Estimate's product description and adjustable-interest-rate table identify the actual schedule for a covered loan.

What are the ARM index and margin?

The index moves with the referenced market measure. The borrower and lender do not renegotiate the borrower's income, credit score or personal risk at each scheduled reset. The note applies its stated formula.

The margin is the fixed contractual addition to the index. If the index is 4.50 percent and the margin is 2.75 percentage points:

Fully indexed rate = 4.50% + 2.75% = 7.25%

That calculation is not necessarily the rate charged at the next adjustment. Caps, floors, rounding and lookback rules can change the applied rate.

SOFR is a reference rate published by the Federal Reserve Bank of New York and can appear in modern documents. Legacy loans may identify another index or a replacement mechanism. The exam answer comes from the facts supplied, not from assuming a market index.

What is an initial ARM rate?

The initial rate is the rate applied at the beginning of the loan. It can equal the fully indexed rate, or it can be discounted or premium-priced relative to that formula.

A discounted initial rate is sometimes called a teaser rate. The label does not make it permanent. A borrower should compare:

• initial rate;
• current index;
• margin;
• fully indexed rate;
• date of first adjustment;
• maximum rate at the first adjustment;
• maximum rate over the loan;
• resulting payment examples.

The CFPB cautions borrowers not to rely on selling or refinancing before the rate changes. Future property value, credit, income, loan pricing and market access can differ from today's assumptions.

What are initial, subsequent and lifetime ARM caps?

Rate caps limit interest-rate changes.

• Initial adjustment cap: limits the first change after the initial fixed period.
• Subsequent adjustment cap: limits each later periodic change.
• Lifetime cap: limits the cumulative rate increase over the loan's life, commonly measured from the initial rate under the contract.

A cap written as 2/1/5 commonly means:

• first adjustment cannot move more than 2 percentage points under the cap terms;
• each later adjustment cannot move more than 1 percentage point;
• total increase cannot exceed 5 percentage points over the stated baseline.

The note can define decreases, floors and rounding separately. Use the contract convention given in the question.

How do ARM caps change a rate calculation?

Assume:

• initial rate: 5.50 percent;
• index at first adjustment: 4.50 percent;
• margin: 2.75 percentage points;
• caps: 2/1/5.

First calculate the formula rate:

4.50% + 2.75% = 7.25%

The first-adjustment ceiling under the 2-point initial cap is:

5.50% + 2.00% = 7.50%

The 7.25 percent formula rate is below the 7.50 percent first-adjustment ceiling, so 7.25 percent can apply, subject to the remaining note terms.

At the next adjustment, suppose the index plus margin equals 9.00 percent. The 1-point subsequent cap limits the increase from 7.25 percent to 8.25 percent for that adjustment. The remaining difference does not automatically disappear or carry forward. The note must permit and describe any carryover.

The 5-point lifetime cap in this example places a 10.50 percent ceiling on increases measured from the 5.50 percent initial rate, subject to the contract's wording.

What is the difference between a rate cap and a payment cap?

A rate cap limits the interest rate change. A payment cap limits how much the scheduled payment may change.

The difference matters because interest can accrue at a rate that produces more interest than the capped payment covers. If the payment does not cover all accrued interest, the unpaid portion can be added to principal. That is negative amortization.

Use this diagnostic:

• rate cap limits the input used to calculate interest;
• payment cap limits the amount currently required from the borrower;
• a payment cap without enough corresponding rate protection can allow balance growth.

Resist the urge to assume that a lower required payment means a lower cost or declining balance.

Can an ARM payment decrease?

It can. If the index falls, the contract can permit a lower rate and payment. A floor, prior cap limitation, carryover rule or other term can limit that decrease.

The accurate answer is not “ARM payments rise.” It is:

An ARM rate can move under its index, margin, caps, floor and adjustment schedule. The payment follows the contract's recalculation rules.

What is an ARM payment-reset example?

Assume a $300,000, 30-year ARM begins at 5.50 percent with monthly P&I of about $1,703.37. After five years of scheduled payments, the balance is about $277,381.81.

If the new permitted rate is 7.25 percent and 25 years remain, the recalculated fully amortizing P&I is about $2,004.93.

Approximate P&I increase using the rounded payments shown = $2,004.93 − $1,703.37 = $301.56 per month

The example holds taxes and insurance outside the calculation. An actual note can use different timing, rounding, accrual, caps and payment features.

What disclosures identify an ARM?

For a covered mortgage transaction, a student or consumer should review:

• Loan Estimate, page 1: product type, initial rate, P&I, whether rate or payment can increase, projected payments and balloon disclosure;
• Loan Estimate, page 2: adjustable-payment or adjustable-interest-rate information when applicable;
• Closing Disclosure: final loan terms and projected payments;
• promissory note and ARM rider: contractual index, margin, adjustment dates, caps, floor, rounding and notice provisions;
• ARM program disclosure and CFPB booklet: program mechanics and examples;
• later adjustment notices: current and new rates, payments, index, margin and limits.

The CFPB also advises checking the Closing Disclosure and note to determine whether an existing loan is fixed or adjustable. A marketing label should not override the signed documents.

When are ARM adjustment notices generally sent?

For covered principal-dwelling ARMs, Regulation Z generally requires the initial adjustment notice at least 210 but not more than 240 days before the first payment at the adjusted level is due. Exceptions address shorter timing and specific loan circumstances.

For later rate adjustments that produce a corresponding payment change, the general window is at least 60 but not more than 120 days before the first adjusted payment is due. Special timing applies to certain frequently adjusting and older loans.

The notices identify the new rate and payment and explain the index, margin and applicable limits. This article uses the timing only to show that an ARM reset is documented. The later Regulation Z article owns the complete disclosure rules and exceptions.

What is a balloon mortgage?

A balloon mortgage has a scheduled payment substantially larger than the regular periodic payments, commonly because the regular payments do not fully amortize the debt before the loan matures.

For the current Loan Estimate rule, Regulation Z section 1026.37 defines a balloon payment as a payment more than twice a regular periodic payment and includes transactions requiring only one or two payments during the loan term.

A common structure is:

• loan term: 5 or 7 years;
• payment calculation: 20, 25 or 30-year amortization;
• regular payments reduce some principal;
• maturity arrives before the amortization schedule reaches zero;
• remaining balance becomes due as the balloon.

The balloon-payment glossary page gives the short definition.

What is the difference between loan term and amortization period?

The loan term ends when the debt matures under the note. The amortization period is the time used to calculate payments that would reduce the loan to zero if those payments continued for the full period.

If term is shorter than amortization:

loan matures before scheduled amortization reaches zero, so a balance remains due

If term equals amortization on a fully amortizing loan:

scheduled payments reduce the balance to zero at maturity

Do not call the longer amortization period an extension right. The borrower has only the maturity term stated in the note unless the lender has made an enforceable renewal commitment.

How do you calculate a partially amortizing balloon?

Assume:

• original principal: $400,000;
• fixed rate: 6 percent;
• payment based on 30-year amortization;
• actual loan term: 7 years.

The scheduled monthly P&I is about $2,398.20. After 84 scheduled payments, the remaining principal is about $358,557.54. That remaining balance, plus any other amount due under the note, becomes the maturity obligation.

The borrower paid principal during the seven years, but not enough to retire the 30-year schedule. The loan is partially amortizing, not interest-only.

Is every balloon mortgage interest-only?

No. A balloon can follow:

• partial amortization;
• full-term interest-only payments;
• one or two payment transactions;
• other contractual schedules that leave a large maturity amount.

Interest-only describes what regular payments cover. Balloon describes the size and timing of a scheduled payment. They often appear together, but they are different features.

Is a balloon payment the same as acceleration?

No.

• Balloon: scheduled under the note for a stated maturity or event.
• Acceleration: a remedy that can make the unpaid debt due after a qualifying default or other contract event and required process.

A borrower can be current on every periodic payment and still owe a scheduled balloon at maturity. Acceleration, by contrast, is linked to a triggering event and the mortgage-clause rules.

The later mortgage-clause article owns acceleration, alienation, defeasance and prepayment.

Can a borrower assume refinancing will pay the balloon?

No. Refinancing is a possible strategy, not a completed source of repayment until approved and closed.

At maturity, refinancing can be affected by:

• property value;
• remaining balance;
• interest rates and product availability;
• income, assets, credit and other debts;
• property condition and use;
• lender and program rules;
• title, insurance and legal issues;
• closing costs and timing.

A sale also depends on finding a buyer and completing a transaction before maturity. The responsible comparison asks how the borrower could pay the balloon if a planned sale or refinance does not occur.

What is a straight or term mortgage?

The New York Department of State syllabus lists straight mortgage/term mortgage as a key term but does not supply a definition. In customary real estate licensing usage, it means a loan in which the borrower pays interest during the term and the principal is due at maturity.

That pattern produces:

• no scheduled principal reduction during the term;
• a principal balance that stays level if every interest payment is made and no principal is prepaid;
• a large final principal payment;
• both interest-only and balloon characteristics.

For covered transactions, Regulation Z identifies these mechanics with Interest Only and Balloon Payment features rather than defining straight mortgage as a federal product label. For a live loan, follow the note and disclosures. For an exam question using the syllabus term, focus on interest during the term and principal at maturity.

What is a straight-mortgage calculation?

Assume:

• principal: $300,000;
• fixed annual rate: 6 percent;
• full term is interest-only;
• monthly payments;
• principal due at maturity.

Monthly interest = $300,000 × 6% ÷ 12 = $1,500

After a scheduled $1,500 interest payment, the principal remains $300,000. At maturity, the borrower owes the $300,000 principal plus any final interest and other amount due under the note.

Do not subtract the $1,500 from principal. It paid accrued interest only.

Is a straight mortgage the same as a temporary interest-only loan?

Not necessarily. A temporary interest-only feature can end before maturity and recast into fully amortizing payments.

Example:

• 30-year loan term;
• interest-only for first 5 years;
• fully amortizing P&I over remaining 25 years.

Principal commonly stays level for the first five years, then the payment rises because the same balance must be repaid over only 25 remaining years. If the balance reaches zero through those later payments, there is no planned balloon.

A straight mortgage in the customary exam sense remains interest-only through the term and leaves principal due at maturity.

What is a graduated-payment mortgage?

A graduated-payment mortgage, or GPM, begins with scheduled payments below the later payment level. Payments then rise at stated intervals under a known schedule.

The initial payment can be less than accrued interest. When that happens:

1. borrower makes the required payment;
2. payment fails to cover all interest;
3. unpaid interest is added to principal under the loan terms;
4. balance increases;
5. later higher payments must address the larger balance and remaining term.

That balance growth is negative amortization. A GPM need not be an ARM. Regulation Z treats a graduated-payment or step-payment structure without a variable-rate feature separately from an adjustable-rate product.

What is a graduated-payment negative-amortization example?

Assume:

• starting principal: $250,000;
• annual rate: 6 percent;
• required first monthly payment: $1,000.

The month's interest is:

$250,000 × 6% ÷ 12 = $1,250

The payment leaves $250 of interest unpaid:

$1,250 − $1,000 = $250

If the note adds that amount to principal:

New balance = $250,000 + $250 = $250,250

The borrower made the required payment, but the debt grew. Payment compliance and principal reduction are different questions.

Does every graduated payment create negative amortization?

No. Negative amortization occurs only when the payment is less than accrued interest and the unpaid amount is added to principal.

A scheduled payment can increase while still covering all interest and reducing principal. Read the allocation:

• payment below interest: negative amortization;
• payment equal to interest: no principal reduction;
• payment above interest: remainder can reduce principal;
• higher payment above the fully amortizing amount: principal can decline faster.

The words graduated payment describe the scheduled payment pattern, not the direction of the balance by themselves.

What is the difference between a GPM and a growing-equity mortgage?

Both can use scheduled payment increases, but the principal effect differs.

Regulation Z commentary calls growing-equity mortgages payment-escalated mortgages and describes scheduled increases used to accelerate amortization. Do not choose negative amortization merely because payments rise.

What is the difference between step rate and step payment?

Step rate means the interest rates that will apply later and the periods for which they apply are known at consummation. Step payment means scheduled regular payment amounts change for reasons other than an interest-rate change.

Under Regulation Z's Loan Estimate terminology:

• unknown future rate based on an index: Adjustable Rate;
• known future rate schedule: Step Rate;
• rate is neither adjustable nor step rate: Fixed Rate;
• scheduled payment changes not caused by rate changes: Step Payment feature.

A fixed-rate loan can therefore have a step-payment feature. A graduated-payment mortgage can be disclosed as a step-payment fixed-rate product. Avoid treating changing payment and changing interest rate as the same fact.

Can one loan combine several mortgage features?

Yes. Examples include:

• fixed-rate, fully amortizing, level-payment loan;
• fixed-rate, interest-only, balloon loan;
• fixed-rate, partially amortizing, balloon loan;
• fixed-rate, graduated-payment loan with early negative amortization;
• adjustable-rate, fully amortizing loan;
• adjustable-rate loan with a temporary interest-only period;
• adjustable-rate loan with a payment cap and potential negative amortization;
• step-rate loan with a balloon at maturity.

Federal product disclosures rank and display features under specific rules. An exam question can instead ask you to identify every feature supported by the facts.

How should you compare these loans without recommending one?

A salesperson can help a consumer organize questions but should leave credit advice and product suitability to licensed mortgage professionals and the consumer's advisers.

Compare:

• starting rate and payment;
• rate after any introductory period;
• index and margin;
• adjustment timing;
• initial, subsequent and lifetime caps;
• floor and payment cap;
• whether payment covers all interest;
• when principal begins to decline;
• loan term versus amortization period;
• balloon amount and due date;
• prepayment terms;
• taxes, insurance and association charges outside P&I;
• total cash needed under reasonable stress scenarios;
• Loan Estimate and Closing Disclosure assumptions.

The task is not to declare one structure universally best. It is to make the tradeoffs visible.

What are the most common mortgage-type misconceptions?

Misconception 1: Fixed rate means fixed total payment

Correction: Fixed rate stabilizes the note rate. Taxes, insurance, mortgage insurance and escrow can change the total amount paid monthly.

Misconception 2: ARM means the lender chooses any new rate

Correction: The note sets the index, margin, adjustment schedule, caps, floor and other calculation terms.

Misconception 3: ARM rates only rise

Correction: The index can move down as well as up. Floors, caps and other terms determine how much of that movement reaches the contract rate.

Misconception 4: A rate cap and payment cap are interchangeable

Correction: A rate cap limits interest-rate movement. A payment cap limits payment movement and can permit unpaid interest to increase principal.

Misconception 5: Every balloon loan is interest-only

Correction: A partially amortizing loan can reduce principal through regular payments and still leave a balloon at maturity.

Misconception 6: The balloon is caused by default

Correction: A balloon is scheduled. Acceleration can make debt due following a qualifying default or contract event.

Misconception 7: A straight mortgage is fully amortizing

Correction: In customary licensing usage, the straight or term mortgage calls for interest during the term and principal at maturity.

Misconception 8: Interest-only payments reduce principal

Correction: A payment equal only to accrued interest leaves principal unchanged.

Misconception 9: Every graduated-payment loan changes its interest rate

Correction: Payments can rise on a known schedule while the interest rate remains fixed.

Misconception 10: Rising payments prove negative amortization

Correction: Negative amortization depends on whether the payment covers accrued interest, not on whether a later payment is higher.

Misconception 11: The borrower can refinance before any reset or balloon

Correction: A future refinance requires a new transaction, approval, available product and completed closing.

Misconception 12: Mortgage labels are mutually exclusive

Correction: Rate, payment, amortization and maturity labels can combine in one loan.

What exam decision tree should you use?

When a question describes a mortgage:

1. Find the rate rule. Fixed, known step schedule or future index formula?
2. Find the payment rule. Level, interest-only, graduated or capped?
3. Test interest coverage. Does the required payment cover accrued interest?
4. Test principal direction. Declining, unchanged or increasing?
5. Compare term and amortization. Does maturity arrive before repayment reaches zero?
6. Identify any large final payment. Balloon or ordinary final rounding?
7. Apply caps in order. Formula rate first, then initial, subsequent and lifetime limits.
8. Keep escrow separate. A tax or insurance change is not an ARM rate reset.
9. Name every supported feature. Do not stop after the first accurate label.

That sequence solves most classification questions without relying on slogans.

Worked scenario: Classify a 7-year loan on 30-year payments

Facts

A loan has a fixed 6 percent rate. Monthly P&I is calculated on a 30-year amortization schedule. The entire remaining balance is due at the end of year seven.

Analysis

• rate is fixed;
• regular payments reduce principal;
• amortization period exceeds term;
• a large balance remains at maturity.

Answer

It is a fixed-rate, partially amortizing balloon mortgage. It is not straight or full-term interest-only because regular payments reduce principal.

Worked scenario: Apply an ARM cap

Facts

An ARM begins at 4.75 percent. At the first adjustment, index plus margin equals 8.00 percent. The initial adjustment cap is 2 percentage points.

Analysis

First-adjustment ceiling = 4.75% + 2.00% = 6.75%

Answer

The formula produces 8.00 percent, but the initial cap limits this adjustment to 6.75 percent, subject to the remaining note terms.

Worked scenario: Separate payment cap from rate cap

Facts

An ARM's interest rate resets upward. Accrued monthly interest becomes $1,900, but a payment cap limits the required payment to $1,700. The note permits unpaid interest to be added to principal.

Analysis

Unpaid interest = $1,900 − $1,700 = $200

Answer

The principal balance increases by $200 for that period. The payment cap did not cap accrued interest enough to prevent negative amortization.

Worked scenario: Identify a straight mortgage

Facts

A borrower pays monthly interest on $500,000 for a five-year term. No principal is scheduled until maturity.

Answer

In New York licensing terminology, this is a straight or term mortgage. It also has full-term interest-only and balloon features. The scheduled principal due at maturity is $500,000, apart from other amounts due.

Worked scenario: Distinguish graduated payment from ARM

Facts

A loan has a fixed 6.25 percent interest rate. Its payments increase by stated amounts each year for four years, then become level.

Answer

It is a fixed-rate loan with a graduated or step-payment feature. The payment changes do not make it an ARM because the interest rate does not reset from an index. You would need the payment and interest amounts to decide whether early negative amortization occurs.

Practice questions

Question 1

Which feature defines a fixed-rate mortgage?

A. Total housing cost cannot change.
B. The contract interest rate does not change.
C. Every payment contains equal principal.
D. No escrow account is permitted.

Answer: B. Fixed rate describes the note rate, not taxes, insurance or the internal principal-interest allocation.

Question 2

An ARM index is 4.25 percent and the margin is 2.50 percentage points. What is the fully indexed rate before caps and rounding?

A. 1.75 percent
B. 4.25 percent
C. 6.75 percent
D. 10.625 percent

Answer: C. Index plus margin equals 4.25 percent plus 2.50 percentage points, or 6.75 percent.

Question 3

What does a subsequent adjustment cap limit?

A. The original loan amount
B. Each later periodic rate change
C. Property-tax increases
D. The lender's margin at closing only

Answer: B. The subsequent cap limits rate movement at later adjustments under the note.

Question 4

A 10-year loan uses payments based on a 30-year amortization schedule and requires the balance in year 10. Which classification is best?

A. Fully amortizing
B. Reverse mortgage
C. Partially amortizing balloon
D. Graduated lease

Answer: C. The term ends before the amortization schedule reaches zero, leaving a balloon.

Question 5

Under customary licensing usage, what happens to principal in a straight or term mortgage?

A. It is paid in equal monthly installments.
B. It commonly remains due until maturity.
C. It is forgiven after the first year.
D. It changes with the property-tax index.

Answer: B. Regular payments commonly cover interest while principal remains due at maturity.

Question 6

A required payment is $1,100 and monthly accrued interest is $1,350. The note adds unpaid interest to principal. What occurs?

A. Principal falls by $250.
B. Principal is unchanged.
C. Principal rises by $250.
D. The rate falls by $250.

Answer: C. The $250 interest shortfall is added to principal, creating negative amortization.

Question 7

Which fact by itself proves that a loan is an ARM?

A. The payment rises on a known schedule.
B. Taxes increase.
C. The interest rate can reset under a future index formula.
D. The loan has a balloon.

Answer: C. A scheduled payment change or balloon can exist with a fixed rate.

Question 8

What is the central difference between a growing-equity mortgage and a traditional graduated-payment mortgage?

A. Growing-equity payment increases are directed toward faster principal reduction rather than early negative amortization.
B. A growing-equity mortgage has no payments.
C. A graduated-payment mortgage has no interest.
D. Only one can secure real property.

Answer: A. Growing-equity increases accelerate amortization, while a traditional GPM can begin with payments below accrued interest.

Question 9

A borrower is current but owes a scheduled $200,000 final payment next month. What feature caused the amount to become due?

A. Acceleration after default
B. Balloon maturity
C. Escrow shortage
D. Property-tax reassessment

Answer: B. The amount is scheduled at maturity even though the borrower is current.

Question 10

Which document is the best source for the contractual ARM index, margin, caps and adjustment dates?

A. Property listing
B. Appraisal photograph
C. Promissory note and applicable ARM rider
D. Deed's granting clause

Answer: C. Federal disclosures summarize the product, but the signed note and rider contain the contractual adjustment terms.

Frequently asked questions

What are the main mortgage types on the New York real estate exam?

The curriculum expressly includes fixed-rate, adjustable-rate, balloon and graduated-payment loans. Its key terms also include straight or term mortgage, amortization, negative amortization, margin and rate and payment caps.

What is the difference between a fixed-rate mortgage and an ARM?

A fixed-rate mortgage keeps the contract interest rate constant. An ARM permits the rate to reset under a stated index, margin, adjustment schedule, caps and other note terms.

Can a fixed-rate mortgage payment increase?

Scheduled P&I can remain level while taxes, insurance, mortgage insurance or escrow changes increase the total payment. A fixed-rate loan can also contain a separate step-payment or balloon feature.

How do you calculate an ARM rate?

Add the stated index and margin to find the fully indexed rate. Then apply the initial or subsequent adjustment cap, lifetime cap, floor, rounding and other note terms.

What does 5/1 ARM mean?

It commonly means the rate is fixed for five years and then adjusts once each year. Other notation, including 5/6, uses a different adjustment interval, so read the product disclosure.

What is a balloon mortgage?

A balloon mortgage schedules a payment much larger than the regular payments, often because the loan term is shorter than the amortization period.

Is a balloon payment a default?

No. A balloon is a scheduled maturity obligation. Failure to pay it can create a default, but the scheduled due date itself is not an acceleration remedy.

What is a straight mortgage?

In customary New York licensing usage, a straight or term mortgage commonly requires interest payments during the term and leaves principal due at maturity. Federal disclosures may label the same mechanics as Interest Only and Balloon Payment features.

What is a graduated-payment mortgage?

A graduated-payment mortgage starts with lower required payments that rise on a stated schedule. If an early payment is below accrued interest, the unpaid interest can increase principal.

Is a graduated-payment mortgage an ARM?

Not by definition. A loan can have a fixed interest rate and scheduled payment increases. A combined graduated-payment ARM can also exist, so the rate formula and payment schedule must be read separately.

What is negative amortization?

Negative amortization occurs when the required payment does not cover accrued interest and the unpaid interest is added to principal, causing the balance to grow.

What is the difference between interest-only and negative amortization?

An interest-only payment covers all accrued interest but no principal. A negatively amortizing payment covers less than accrued interest, so the balance increases.

Can one loan be fixed-rate and balloon?

Yes. A fixed-rate loan can use payments based on a longer amortization period and require the remaining balance at an earlier maturity.

Can one loan be adjustable-rate and interest-only?

Yes. Rate structure and payment structure are separate. An ARM can permit interest-only payments for a stated period before recasting to amortizing payments.

Which mortgage type is best?

There is no universal answer. The rate path, payment path, amortization, maturity, costs, borrower plans and ability to absorb adverse changes all matter. A salesperson should explain general terms and refer product advice to qualified mortgage professionals.

What should I study next?

Continue the finance sequence:

1. review how the promissory note states the debt while the mortgage secures it;
2. confirm how PITI and escrow differ from the true monthly housing cost;
3. review the Real Estate Finance subject hub;
4. practice the simple-interest calculations used in exam questions;
5. use the amortization and balloon payment term pages for rapid recall;
6. move next to the mortgage-clause article, then foreclosure and assumption, before studying individual loan programs.

Sources and verification notes

This article was checked against primary government materials available through August 27, 2026. The central sources are:

• New York State Department of State, Real Estate Salesperson 77-Hour Curriculum, Subject 5 and its key terms;
• Consumer Financial Protection Bureau, fixed-rate versus adjustable-rate mortgage, updated May 21, 2026;
• Consumer Financial Protection Bureau, identifying a fixed or adjustable mortgage, disclosure and note review;
• Consumer Financial Protection Bureau, ARM index and margin, fully indexed rate formula;
• Consumer Financial Protection Bureau, ARM rate caps, initial, subsequent and lifetime caps;
• Consumer Financial Protection Bureau, Consumer Handbook on Adjustable-Rate Mortgages, ARM comparison and risk questions;
• Consumer Financial Protection Bureau, Regulation Z section 1026.17 commentary, graduated-payment, step-rate, variable-rate and growing-equity treatment;
• Consumer Financial Protection Bureau, Regulation Z section 1026.19, early ARM program disclosures;
• Consumer Financial Protection Bureau, Regulation Z section 1026.20, ARM adjustment notices;
• Consumer Financial Protection Bureau, Regulation Z section 1026.37, Loan Estimate product and feature terminology;
• Consumer Financial Protection Bureau, Regulation Z section 1026.43 and official interpretations, amortization, balloon, interest-only, graduated-payment and ability-to-repay examples;
• Consumer Financial Protection Bureau, mortgage key terms, amortization, negative amortization and balloon-payment explanations;
• United States Department of Housing and Urban Development, archived Graduated Payment Mortgage Program handbook 4240.2, historical Section 245 payment schedules and balance mechanics, not evidence that a particular product is currently offered;
• Federal Reserve Bank of New York, reference rates, SOFR, SOFR averages and SOFR index;
• Consumer Financial Protection Bureau, LIBOR transition FAQs, treatment of legacy ARM index replacement and SOFR-based notice examples.

The phrase straight or term mortgage is presented as New York licensing vocabulary because the Department of State syllabus lists the paired term without defining it. The article states the customary exam-preparation meaning and separately identifies the Interest Only and Balloon Payment labels used by current federal disclosures.

All numerical examples are original teaching calculations. They use simplified assumptions stated with each problem and are not quotations from a state examination, live loan offers or predictions of market rates. A specific loan is governed by its note, riders, disclosures and applicable law.