Texas Real Estate State Practice Exam

Which type of clause allows the lender to raise the existing interest rate on a mortgage in Texas?

1. Subordination Clause

2. Power of Sale Clause

3. Escalation Clause

4. Assumption Clause

The correct answer is: Escalation Clause

The correct answer is indeed the escalation clause. This type of clause specifically allows a lender to increase the interest rate on a mortgage under certain specified conditions, often related to changes in financial markets or the borrower's creditworthiness. For example, if the borrower does not meet certain performance criteria, the lender may have the right to adjust the interest rate. In Texas real estate finance, understanding the implications of an escalation clause is crucial for both borrowers and lenders, as it directly affects the cost of borrowing over the term of the loan. This clause is generally spelled out in the loan agreement, so borrowers should be aware of its existence and the conditions under which it can be activated. Other clauses mentioned serve different purposes: a subordination clause relates to the priority of liens, a power of sale clause enables a lender to foreclose without court action, and an assumption clause allows a subsequent buyer to take over the mortgage terms but does not impact interest rates directly.