CMA Mortgage Products & Loan Types 3 — Questions and Answers
Question 1: Which mortgage product typically offers the lowest initial interest rate but carries the most payment uncertainty after the initial period?
- 30-year fixed-rate mortgage
- 15-year fixed-rate mortgage
- Adjustable-rate mortgage (ARM) (Correct answer)
- FHA fixed-rate mortgage
Correct answer: Adjustable-rate mortgage (ARM)
ARMs offer lower initial 'teaser' rates, but after the fixed period ends, payments can fluctuate based on market index changes.
Question 2: What is the purpose of a 'rate cap' on an adjustable-rate mortgage?
- It locks the rate permanently after the first adjustment
- It limits how much the interest rate can increase per adjustment period and over the loan life (Correct answer)
- It guarantees the rate will not decrease below a certain floor
- It sets the margin used to calculate the fully indexed rate
Correct answer: It limits how much the interest rate can increase per adjustment period and over the loan life
Rate caps on ARMs limit the amount the interest rate can change per adjustment period (periodic cap) and over the life of the loan (lifetime cap).
Question 3: A construction-to-permanent loan differs from a standalone construction loan in that it:
- Only finances the land purchase, not construction costs
- Automatically converts to permanent financing after construction without a second closing (Correct answer)
- Requires full repayment when construction is complete
- Is only available through FHA programs
Correct answer: Automatically converts to permanent financing after construction without a second closing
A construction-to-permanent loan converts automatically to a permanent mortgage upon completion, saving the borrower from a second closing.
Question 4: Which loan program has both an upfront mortgage insurance premium (UFMIP) and an annual mortgage insurance premium (MIP)?
- Conventional loan
- VA loan
- FHA loan (Correct answer)
- USDA Guaranteed loan
Correct answer: FHA loan
FHA loans require both an upfront MIP (typically 1.75% of the loan amount) and an annual MIP paid monthly.
Question 5: A 'jumbo loan' is best defined as:
- Any loan with an LTV over 80%
- A mortgage that exceeds the conforming loan limits set by the FHFA (Correct answer)
- A loan with a term greater than 30 years
- A loan that requires two borrowers
Correct answer: A mortgage that exceeds the conforming loan limits set by the FHFA
Jumbo loans exceed the conforming loan limits established annually by the Federal Housing Finance Agency (FHFA) and cannot be purchased by Fannie Mae or Freddie Mac.
Question 6: A reverse mortgage is primarily designed for homeowners who are:
- First-time buyers with limited income
- At least 62 years old and want to convert home equity to cash without monthly payments (Correct answer)
- Investors purchasing rental properties
- Borrowers with poor credit who cannot qualify for conventional financing
Correct answer: At least 62 years old and want to convert home equity to cash without monthly payments
Reverse mortgages allow homeowners aged 62 or older to convert home equity into cash without making monthly mortgage payments.
Question 7: What is the 'index' in an adjustable-rate mortgage?
- The lender's profit margin added to the rate
- A publicly available benchmark interest rate used to calculate rate adjustments (Correct answer)
- The maximum rate the loan can reach over its life
- The initial rate during the fixed period
Correct answer: A publicly available benchmark interest rate used to calculate rate adjustments
The index is a publicly published benchmark (such as SOFR or the 1-year Treasury) to which the lender's margin is added to determine the adjusted rate.
CMA Mortgage Products & Loan Types 3
Which mortgage product typically offers the lowest initial interest rate but carries the most payment uncertainty after the initial period?