Mortgage Loan Originator (MLO) Licensing Practice Test 2025 - Free MLO Practice Questions and Study Guide

A Reverse Mortgage is classified as a negatively amortizing loan because, in this type of loan, the loan balance increases over time rather than decreasing. This occurs because the homeowner is not required to make monthly mortgage payments. Instead, the interest and fees are added to the loan balance, resulting in a situation where the total amount owed grows as time goes on.

In a reversed mortgage scenario, the borrower receives funds from the lender based on the equity in their home without the obligation to pay back that amount until they sell the home, move out, or pass away. If the accumulated interest and fees exceed the initial loan amount, it can lead to negative amortization, directly contributing to the ballooning of the loan balance over the life of the loan. Understanding this aspect is crucial for borrowers, as it impacts the equity they can retain in their home and the total amount due at the time of repayment.