CFPB Questions and Answers Flashcards
What is a balloon loan?
A balloon loan is a mortgage that requires a larger-than-usual one-time payment at the end of the term. This can mean lower payments in the years before the balloon payment comes due. Generally, a balloon payment is equal to more than two times the loan’s average monthly payment, often in the tens of thousands of dollars.
When is a balloon loan not allowed?
A balloon payment is generally not allowed in a qualified mortgage, though there are limited exceptions.
What is a construction loan?
A construction loan is usually a short-term loan that provides funds to cover the cost of building or rehabilitating a home. In general, construction loans have higher interest rates than longer-term mortgage loans used to purchase homes. The money borrowed through a construction loan is typically provided in a series of advances, payable as construction progresses. Payments sometimes start on a construction loan six to 24 months after the loan is made.
How can a construction loan be paid off?
The balance of a construction loan may be paid off in a lump sum, or the loan may be converted to a conventional mortgage loan; if a construction loan does not automatically convert, the borrower may have to apply for a new loan.
What are discount points or “points”?
One point equals 1% of the loan amount. For example, on a $100,000 loan, one point is equal to $1,000. What is commonly referred to as a “discount point” in the mortgage industry is a point paid to the lender or broker to reduce the interest rate on the loan. In general, the more discount points paid, the lower the rate. Some points do not lower the interest rate but are paid to cover other costs (e.g., origination fees, mortgage broker’s fee).
What is the difference between the interest rate and the APR?
- The interest rate is the cost of borrowing money, expressed as a percentage. It does not reflect fees or any other charges the borrower will be required to pay for the loan.
- The APR, also expressed as a percentage, is a broader measure of the cost of borrowing money. The APR reflects not only the interest rate, but also the points, broker fees, and certain other charges that are associated with getting the loan, including certain closing costs. For that reason, the APR is usually higher than the interest rate.
What is a loan-to-value ratio and how does it relate to loan costs?
Lenders use the loan-to-value ratio as a measure to compare the amount of a first mortgage loan product with the purchase price or appraised value of the property. The higher the down payment, the lower the loan-to-value ratio. Some lenders require a borrower to get private mortgage insurance when the loan amount is too close to the value of the home. The cost of private mortgage insurance will increase the borrower’s monthly costs.
What is negative amortization?
Amortization means paying off a loan with regular payments. Negative amortization occurs when the minimum payment made does not cover the interest owing and the unpaid interest gets added to the outstanding principal balance, increasing that amount instead of decreasing it.
What happens to the principal balance when it comes to negative ammortization?
Negative amortization results in an increase in the principal balance owing. The borrower ends up paying not only interest on the money borrowed, but interest on the interest that is added to the back end of the loan. This dramatically increases the total amount of debt and the cost of the loan.
What is private mortgage insurance?
Private mortgage insurance protects the lender if the borrower stops making payments on a loan. A lender may require the purchase of PMI if a borrower’s down payment is less than 20% (i.e., the loan-to-value ratio is greater than 80%).
When can PMI be cancelled?
PMI may be canceled upon the written request of the borrower when the mortgage is paid to 80% LTV if the borrower has been current with loan payments, there are no subordinate liens on the property, and the property is not worth less than it was at the time of purchase. PMI is automatically canceled at 78% LTV if the borrower is current with loan payments, or when the loan reaches its midpoint.
What is the difference between PMI and MIP?
MIP serves a similar function to PMI, but is only applicable to FHA loans and is paid in two methods: an upfront premium paid at closing (UFMIP) and in annual installments divided across the loan’s monthly mortgage payment (annual MIP). The term for which MIP must be paid on an FHA loan depends on factors such as loan term and LTV ratio.
How long does a borrower have to rescind and when does the point of recission start?
Unless the borrower waives the right of rescission, he or she has until midnight of the third business day after the latest of:
- Consummation of the loan
- Delivery of the notice of the right to rescind, or
- Delivery of all material disclosures (i.e., disclosures required under Regulation Z)
What are business days when it comes to recission?
For rescission purposes, business days include Saturdays, but not Sundays or legal public holidays. For example, if the last of the above three events occurs on a Friday, the borrower would have until midnight on the following Tuesday to rescind.
Is there any reason the mortgage payment would change over the life of the loan?
The amount of a mortgage payment would change if the loan is an adjustable-rate loan. In this type of loan, the payments can go up or down based on the terms of the loan contract.
