Mortgage Mortgage Terms Question and Answers 2 — Questions and Answers
Question 1: What does the term 'escrow' refer to in a mortgage context?
- A third-party account that holds funds for taxes and insurance (Correct answer)
- The total amount of interest paid over the life of a loan
- The percentage of the home's value used as a down payment
- A penalty charged for paying off a mortgage early
Correct answer: A third-party account that holds funds for taxes and insurance
Escrow is a third-party account managed by the lender to collect and pay property taxes and homeowners insurance on behalf of the borrower.
Question 2: What is a 'balloon payment' in mortgage lending?
- A small additional payment made each month toward principal
- A large lump-sum payment due at the end of the loan term (Correct answer)
- The first payment made after closing on a mortgage
- An extra fee charged when refinancing a loan
Correct answer: A large lump-sum payment due at the end of the loan term
A balloon payment is a large, one-time payment due at the end of a mortgage term that has not been fully amortized.
Question 3: What does 'loan-to-value ratio' (LTV) measure?
- The borrower's monthly debt compared to monthly income
- The ratio of the loan amount to the appraised value of the property (Correct answer)
- The total interest paid compared to the original loan balance
- The percentage of the loan that has been paid off
Correct answer: The ratio of the loan amount to the appraised value of the property
LTV is calculated by dividing the mortgage amount by the appraised property value, expressed as a percentage.
Question 4: What is 'private mortgage insurance' (PMI) typically required for?
- All government-backed FHA loans regardless of down payment
- Conventional loans with a down payment of less than 20% (Correct answer)
- Any mortgage with a fixed interest rate
- Loans taken out by first-time homebuyers only
Correct answer: Conventional loans with a down payment of less than 20%
PMI is generally required on conventional loans when the borrower puts down less than 20% of the home's purchase price.
Question 5: What does the term 'amortization' describe in a mortgage?
- The process of gradually paying off a loan through scheduled payments of principal and interest (Correct answer)
- The initial period during which only interest payments are required
- The act of transferring a mortgage from one lender to another
- The adjustment of an interest rate based on market conditions
Correct answer: The process of gradually paying off a loan through scheduled payments of principal and interest
Amortization is the process of spreading loan payments over time so that both principal and interest are paid down by the end of the term.
Question 6: What is a 'subordination clause' in a mortgage agreement?
- A clause that allows the borrower to skip one payment per year
- A provision that establishes lien priority among multiple mortgages (Correct answer)
- A requirement that the borrower maintain homeowners insurance
- A penalty imposed when a borrower defaults on the loan
Correct answer: A provision that establishes lien priority among multiple mortgages
A subordination clause determines the ranking of debt claims on a property, establishing which lender gets paid first in the event of foreclosure.
Mortgage Mortgage Terms Question and Answers 2
What does the term 'escrow' refer to in a mortgage context?