Which of the following is a potential consequence of defaulting on a mortgage?

• A. Loss of equity
• B. An increase in the loan interest rate
• C. Approval for a new loan
• D. Reinstatement of the loan terms

Answer: (A)

When a borrower defaults on a mortgage, they typically lose equity in the property. Equity is the portion of the home's value that the owner truly owns, calculated as the market value of the home minus the mortgage balance. When a borrower defaults, the lender may initiate foreclosure, which can lead to the sale of the home at a public auction. If the home sells for less than the outstanding mortgage, the borrower could lose all the equity they built up in the property.

Defaulting generally does not lead to an increase in the loan interest rate on the current mortgage, as the terms of the loan would already be set. Additionally, defaulting would not result in approval for a new loan; rather, it would likely damage the borrower's credit score, making it harder to secure new financing. Reinstatement of loan terms is not a direct consequence of defaulting; while there are options to cure a default in certain situations, this does not occur automatically and might require specific actions from the borrower which could include catching up on missed payments. Thus, the primary and most immediate financial impact of default is indeed the loss of equity.