Arizona Real Estate License Real Estate Financing Concepts 2 — Questions and Answers
Question 1: In a fully amortized loan, what happens to the interest portion of each payment over the life of the loan?
- It stays the same each payment
- It decreases as the principal balance declines (Correct answer)
- It increases as the balance declines
- It is paid entirely in the final payment
Correct answer: It decreases as the principal balance declines
As principal is paid down, less interest accrues, so the interest portion of each fixed payment shrinks while the principal portion grows.
Question 2: A loan that requires a large final payment because it is not fully amortized is called a:
- Balloon loan (Correct answer)
- Fully amortized loan
- Straight loan
- Reverse mortgage
Correct answer: Balloon loan
A balloon loan has payments that do not fully retire the debt, leaving a large lump-sum balloon payment due at the end.
Question 3: What is the primary purpose of a promissory note in a real estate transaction?
- It transfers title to the buyer
- It is the borrower's written promise to repay the debt (Correct answer)
- It insures the lender against default
- It records the deed with the county
Correct answer: It is the borrower's written promise to repay the debt
The promissory note is the borrower's personal promise to repay the loan and serves as the evidence of the debt.
Question 4: In Arizona, which security instrument is most commonly used to secure real estate loans?
- Mortgage
- Deed of trust (Correct answer)
- Land contract
- Estoppel certificate
Correct answer: Deed of trust
Arizona is a deed of trust state, using a trustee to hold title as security and allowing non-judicial foreclosure.
Question 5: A buyer assumes an existing loan 'subject to' the mortgage. Who remains primarily liable for the debt?
- The buyer only
- The original borrower (seller) (Correct answer)
- The lender
- The title company
Correct answer: The original borrower (seller)
Taking title 'subject to' means the buyer is not personally liable and the original borrower remains responsible for the debt.
Question 6: What does the term 'loan-to-value ratio' (LTV) measure?
- The borrower's income versus debt
- The loan amount compared to the property's value (Correct answer)
- The interest rate versus market rate
- The property tax versus assessed value
Correct answer: The loan amount compared to the property's value
LTV is the loan amount divided by the appraised value or purchase price, indicating the lender's risk exposure.
Question 7: Private mortgage insurance (PMI) is typically required when:
- The down payment is less than 20% (Correct answer)
- The loan is a VA loan
- The buyer pays all cash
- The property is commercial
Correct answer: The down payment is less than 20%
Lenders require PMI on conventional loans when the down payment is under 20% to protect against borrower default.
Arizona Real Estate License Real Estate Financing Concepts 2
In a fully amortized loan, what happens to the interest portion of each payment over the life of the loan?