Arkansas Real Estate License Property Valuation and Financing 4 — Questions and Answers
Question 1: Which loan feature allows the interest rate to change periodically based on a financial index, potentially raising or lowering monthly payments?
- Adjustable-rate mortgage (ARM) (Correct answer)
- Fixed-rate mortgage
- Balloon mortgage
- Wraparound mortgage
Correct answer: Adjustable-rate mortgage (ARM)
An ARM has an interest rate tied to a financial index that can adjust at specified intervals during the loan term.
Question 2: A comparable property sold for $210,000. The comparable has a two-car garage worth $8,000 that the subject property lacks. What adjusted sale price should be used for the comparable?
- $202,000 (Correct answer)
- $218,000
- $210,000
- $200,000
Correct answer: $202,000
Because the comparable is superior (has a garage), subtract $8,000 from the sale price: $210,000 − $8,000 = $202,000.
Question 3: In Arkansas, the USDA Rural Development loan program is designed to benefit:
- Buyers purchasing in eligible rural and suburban areas who meet income limits (Correct answer)
- Farmers purchasing agricultural equipment
- Commercial developers building rural infrastructure
- Any buyer regardless of location or income
Correct answer: Buyers purchasing in eligible rural and suburban areas who meet income limits
USDA loans assist low-to-moderate income buyers purchasing in USDA-designated rural and suburban areas.
Question 4: The principle of substitution, which underlies all three appraisal approaches, states that:
- A buyer will pay no more for a property than the cost of acquiring an equally desirable substitute (Correct answer)
- Property values are determined primarily by the income they produce
- Value is created by anticipation of future benefits
- The highest and best use maximizes a property's value
Correct answer: A buyer will pay no more for a property than the cost of acquiring an equally desirable substitute
The principle of substitution holds that an informed buyer won't overpay when a comparable property is available at a lower price.
Question 5: What is a 'balloon mortgage' in Arkansas real estate financing?
- A loan with smaller regular payments followed by one large final payment (Correct answer)
- A mortgage that increases in payment amounts over time
- A loan with no down payment requirement
- A mortgage with an interest rate that adjusts monthly
Correct answer: A loan with smaller regular payments followed by one large final payment
A balloon mortgage has regular (often interest-only or partially amortizing) payments with a large lump-sum payment due at the end of the term.
Question 6: Which of the following is the BEST definition of 'market value' used in Arkansas real estate appraisals?
- The most probable price a property will sell for in a competitive, open market with knowledgeable parties acting in their own best interests (Correct answer)
- The assessed value determined by the county assessor for tax purposes
- The replacement cost of the property minus depreciation
- The price the seller originally paid for the property
Correct answer: The most probable price a property will sell for in a competitive, open market with knowledgeable parties acting in their own best interests
Market value is the most probable sale price in an arm's-length transaction between informed, willing buyers and sellers with adequate time on the market.
Question 7: A property is encumbered by an existing mortgage that the buyer agrees to take over responsibility for. This arrangement is called:
- Assumption of mortgage (Correct answer)
- Novation
- Subordination
- Alienation
Correct answer: Assumption of mortgage
An assumption of mortgage occurs when the buyer takes over the seller's existing loan and becomes personally liable for the debt.
Arkansas Real Estate License Property Valuation and Financing 4
Which loan feature allows the interest rate to change periodically based on a financial index, potentially raising or lowering monthly payments?