Mortgage Loan Products PrepXL Flashcards
Which of the following loans would not require any monthly payment?
A.All loans require a monthly payment
B.Negative amortization mortgage
C.Reverse mortgage
D.Interest-only mortgage
The answer is reverse mortgage.
A home equity conversion mortgage (HECM), or reverse mortgage, is a loan that enables an individual aged 62 or older to convert some of the equity in his or her primary residence to cash. The loan has no specified term, prepayment penalties, or credit or income qualifications, as it requires no repayment until either the property is sold or the owner dies, permanently moves, fails to live in the house for 12 consecutive months, or fails to pay property taxes, maintain hazard and/or flood insurance coverage, or maintain the property (i.e., perform necessary repairs).
A HECM is repaid:
A.Monthly, with interest-only payments
B.Monthly, with fully-amortizing payments
C.Monthly, with negatively-amortizing payments and a balloon payment
D.Upon the borrower’s death or sale of the property
The answer is upon the borrower’s death or sale of the property. A home equity conversion mortgage (HECM), or reverse mortgage, is a loan that enables an individual aged 62 or older to convert some of the equity in his or her primary residence to cash. The loan has no specified term, prepayment penalties, or credit or income qualifications, as it requires no repayment until either the property is sold or the owner dies, permanently moves, fails to live in the house for 12 consecutive months, or fails to pay property taxes, maintain hazard and/or flood insurance coverage, or maintain the property (i.e., perform necessary repairs).
A loan which requires payments consisting of enough principal and interest to completely pay the loan off at the end of the loan term is a(n):
A.Fully-amortizing mortgage
B.Balloon mortgage
C.HECM
D.Negatively-amortizing mortgage
The answer is fully-amortizing mortgage. A fully-amortizing, or self-liquidating, mortgage provides for periodic payments that repay the loan in its entirety by the end of the mortgage term.
At the same time that he obtains his first mortgage loan, a homebuyer obtains a second closed-end mortgage loan in order to cover part of his down payment. This second loan is:
A.A primary mortgage loan
B.A subprime loan
C.A simultaneous loan
D.A home equity line of credit
The answer is a simultaneous loan. A second loan obtained to cover some or all of a loan applicant’s down payment is a simultaneous loan. Under the Ability to Repay Rule, a lender must make a good faith determination that the applicant will be able to repay both the first and second mortgage loans according to their terms.
With respect to an adjustable-rate mortgage, which of the following is used in combination with the margin to help determine rate adjustments over the course of the loan term?
A.LTV
B.Fully-indexed rate
C.Balloon period
D.Index
The answer is index.
The interest rate on an adjustable-rate mortgage loan is the sum of the index rate and the lender’s margin.
The index rate may change during the course of the loan, while the margin remains the same. Common indices include the Cost of Funds Index (COFI), Secured Overnight Financing Rate (SOFR), and One-Year Constant Maturity Treasury Index (CMT).
A ten-year adjustable-rate mortgage has rate caps of 3/2/10 with an initial interest rate of 6% (2% margin + 4% index). Which of the following is true?
A.The lifetime cap of the loan is 5%
B.The interest rate cannot increase by more than 3% in any one adjustment period
C.At the first rate adjustment, the interest rate will increase to 7.5%
D.Over the term of the loan, the interest rate may not rise higher than 16%
The answer is over the term of the loan, the interest rate may not rise higher than 16%.
The interest rate on a ten-year ARM with rate caps of 3/2/10 and an initial rate of 6% has a lifetime rate cap of 10%, meaning that the highest rate the loan can reach over its term is 16%. In this example, the initial cap is 3%; in other words, the rate may not increase at its first adjustment by more than 3% over the initial 6%. Subsequent to the first adjustment, the rate may not increase by more than 2% in any one adjustment period.
An adjustable-rate mortgage has an initial rate of 5%; the margin is 2.5%. It has a periodic rate cap of 2% and a lifetime cap of 8%. At the first rate adjustment, the index is 3.25%. What is the new interest rate at adjustment?
A.7.5%
B.5.75%
C.8.25%
D.7.0%
The answer is 5.75%.
The ARM in the example has an initial rate of 5%.
At the first rate adjustment, the index increases to 3.25%. The rate adjustment would be calculated by adding together the current index (3.25%) and margin (2.5%).
This new rate is 5.75% (2.5% + 3.25% = 5.75%).
The periodic rate cap does not apply, because the increase in the index does not result in the interest rate increasing by more than 2%.
A temporary loan used to finance the costs of building a home during construction is referred to as a(n):
A.Bridge loan
B.Interim loan
C.Cross-collateralized loan
D.Construction loan
The answer is construction loan. A construction loan is high-interest interim, or temporary, financing, used to finance the cost of labor and materials used during the construction of a dwelling. It extends from the start to the completion of work, at which time it is paid off or converted to a permanent loan.
An adjustable-rate mortgage has a one-year introductory rate of 2.5%, after which the rate increases to the nominal rate of 4% (2% margin, 2% index) with annual rate adjustments. The loan provides for a 2.5% periodic interest rate cap. In year three, the index is 5%. What will the interest rate be in year three?
A.7%
B.6.5%
C.4.5%
D.5%
The answer is 6.5%.
In year two, the rate adjusts from the low introductory 2.5% to 4%. A periodic cap of 2.5% will limit any further rate adjustments. In year three, the fully-indexed rate is calculated by adding together the index and margin (5% + 2% = 7%). However, this exceeds the amount permissible by the cap. Thus, the rate is limited to 6.5%.
A home equity line of credit is a form of:
A.Open-end financing
B.Closed-end financing
C.Subprime financing
D.Conforming
The answer is open-end financing. A home equity line of credit allows a borrower to borrow over and over, as he or she would using a credit card, while the home equity loan is a one-time loan of a fixed amount.
Which of the following is true of the repayment of a construction loan?
A.Principal is repaid when all the work is completed
B.Interest is paid upfront, when the funds are released
C.Principal and interest are paid in installments until the work is completed
D.Principal is repaid in installments until the work is completed
The answer is principal is repaid when all the work is completed. Repayment of the principal of a construction loan is required at the time work is concluded. Interest is charged on funds as they are released and repaid in interest-only installments while work is ongoing.
A borrower has a fixed-rate mortgage with an escrow account for taxes and insurance. Which of the following could cause a change in the borrower’s payment?
A.Change in property taxes
B.Borrower default
C.Late payment by borrower
D.Change in prime
The answer is change in property taxes. With a fixed-rate mortgage loan, a borrower’s payment amount remains the same throughout the term of the loan. However, if the property taxes and/or hazard insurance are paid by way of an escrow account into which a portion of the borrower’s payment is deposited, and either of those items increases or decreases, the borrower’s payment amount will change.
Which of the following is NOT a characteristic of a nontraditional mortgage loan product?
A.A 30-year fixed rate
B.A provision allowing negative amortization
C.Use of the SOFR Index
D.Interest-only payments
The answer is a 30-year fixed rate. Pursuant to the S.A.F.E. Act, a nontraditional mortgage loan is any loan transaction that is not a 30-year fixed-rate mortgage loan. Negative amortization, provision for prepayment penalties, and interest-only payments are all examples of nontraditional loan terms.
The lender controls which of the following parameters of an ARM?
A.Margin
B.Index
C.Fully-indexed rate
D.Note rate
The answer is margin. The interest rate for an adjustable-rate mortgage loan is comprised of the lender’s margin, which remains the same throughout the term of the loan, and the index. The margin is set and controlled by the lender.
With respect to an adjustable-rate mortgage (ARM), which of the following is set by the lender at closing and does not vary throughout the term of the loan?
A.Index
B.Fully-indexed rate
C.Balloon period
D.Margin
The answer is margin.
The interest rate on an adjustable-rate mortgage loan is the sum of the index rate and the lender’s margin. The margin, expressed as a percentage, is set by the lender and represents its costs and profit. While the index rate may change during the course of the loan, the margin remains the same.
