Chapter 10 Quiz: Alternative Financing

Question 1

A loan balance (owed) that grows rather than decreases due to unpaid interest being added back into the loan is said to have:

a. a split term
b. a margin
c. negative amortization
d. positive amortization

Answer 1

c. negative amortization (p.265)

When the minimum monthly payments are not large enough to pay all the interest due on the loan and this unpaid interest is added to the remaining balance of the loan, it is called negative amortization.

Question 2

Alternate financing plans are most popular:

a. during times of low interest rates
b. during times of high interest rates
c. with older borrowers
d. with younger borrowers

Answer 2

b. during times of high interest rates (p. 254)

Alternative financing plans are most popular in times of high interest rates.

Question 3

The payment of points to reduce the amount of interest on a loan is called:

a. meeting margin
b. an index loan
c. a cap
d. a buydown

Answer 3

d. a buydown (p. 256)

When the seller (or a third party) pays points to reduce the buyer’s interest rate, it is called a buydown. It is far easier to sell property if the buyer’s interest rate is relatively low and affordable.

Question 4

An amount added to cover administrative costs and profit is called:

a. an index
b. cost of funds
c. margin
d. a cap

Answer 4

c. margin (p. 262)

Since the index is a reflection of the lender’s cost of money, it is necessary to add a “margin” to the index to ensure sufficient income for administrative expenses and profit.

Question 5

Mortgage payment caps are generally limited by lenders to an annual increase of:

a. 1%
b. 2%
c. 5%
d. 7.5%

Answer 5

d. 7.5% (p. 265)

Some lenders incorporate payment adjustment caps into their ARMs, usually in the area of 7.5% annually. Other lenders only impose annual interest rate caps that work to limit payment increases.

Question 6

The most popular alternative to the fixed-rate mortgage is called:

a. the growth equity mortgage
b. a soft money loan
c. a hard money loan
d. an adjusted rate mortgage

Answer 6

d. an adjusted-rate mortgage (p. p. 260)

The most popular and widely accepted form of alternative financing is the adjustable-rate mortgage, universally referred to as an ARM.

The ARM is a mortgage that permits the lender to periodically adjust the interest rate so it will accurately reflect fluctuations in the cost of money, subject to certain limitations.

Question 7

Lenders offering adjustable-rate mortgages must:

a. comply with Regulation Z
b. provide the borrower with a general brochure
c. make certain specific disclosures
d. all of the above

Answer 7

d. all of the above

Question 8

In a Growth Equity Mortgage (GEM):

a. payments increase annually
b. payments decrease annually
c. interest increases annually
d. interest decreases annually

Answer 8

a. payments increase annually

Question 9

“One Point” is:

a. $1,000
b. 1% of the sales price
c. 1% of the loan amount
d. none of the above

Answer 9

c. 1% of the loan amount (p. 254)

The term “point” is short for “percentage point”. It is ONE percentage point of the LOAN AMOUNT.

Question 10

What age must a reverse mortgage borrower be?

a. under 60
b. over 62
c. over 64
d. over 65

Answer 10

b. over 62 (p. p 276)

A reverse mortgage borrower generally must be over age 62 and own a home with little or no outstanding mortgage balance.