Loans Mortgage Loan 2

Question 1

What is the purpose of private mortgage insurance (PMI)?

Accepted Answer

It protects the lender if the borrower defaults

Answer

PMI protects the lender—not the borrower—against losses if the borrower defaults on the loan.

Question 2

Which mortgage type features an interest rate that adjusts periodically based on a market index?

Accepted Answer

Adjustable-rate mortgage (ARM)

Answer

An adjustable-rate mortgage (ARM) has an interest rate that changes at set intervals tied to a benchmark index such as SOFR.

Question 3

A borrower takes out a 5/1 ARM. What does the '1' represent?

Accepted Answer

The rate adjusts every 1 year after the initial fixed period

Answer

In a 5/1 ARM, the '5' is the initial fixed-rate period in years and the '1' is how often (in years) the rate adjusts afterward.

Question 4

What does a mortgage rate 'cap' limit?

Accepted Answer

How much the interest rate can increase per adjustment period or over the life of the loan

Answer

Rate caps on ARMs restrict how much the interest rate can rise during each adjustment period and over the loan's lifetime.

Question 5

Which federal law requires lenders to disclose the Annual Percentage Rate (APR) to mortgage borrowers?

Accepted Answer

The Truth in Lending Act (TILA)

Answer

TILA (Regulation Z) requires lenders to disclose the APR and other loan terms so borrowers can compare costs accurately.

Loans Practice Test