Illinois Real Estate Practice Exam

What happens at the end of a term loan used for financing a home purchase?

1. Balloon payment

2. Loan modification

3. Full loan forgiveness

4. Transfer of loan

The correct answer is: Balloon payment

A balloon payment occurs at the end of a term loan used for financing a home purchase when the loan is not fully amortized throughout its term. This means that during the term of the loan, typically lower monthly payments are made, which only cover the interest or a portion of the principal. At the end of the term, the remaining balance of the loan comes due in a lump sum, known as the balloon payment. This type of loan is commonly structured this way to make initial payments more manageable; however, the borrower must be prepared to pay the large amount due at the end of the loan period. The other options are distinct processes. A loan modification involves changing the terms of the loan, such as the interest rate or payment schedule, often due to the borrower's financial difficulties. Full loan forgiveness would mean that the borrower is no longer required to pay back the loan, which is not typical for a standard financing agreement. The transfer of loan refers to the process by which the loan is assigned from one lender to another or from one borrower to another, which does not inherently occur at the end of the term.