Mortgage General Mortgage Knowledge 5

Question 1

What is a 'cash-out refinance'?

Accepted Answer

Replacing an existing mortgage with a larger loan and receiving the difference in cash

Answer

A cash-out refinance replaces the existing mortgage with a new, larger loan, and the borrower receives the difference between the two loan amounts as cash.

Question 2

What does 'negative amortization' mean?

Accepted Answer

When monthly payments are insufficient to cover interest, causing the loan balance to increase

Answer

Negative amortization occurs when minimum payments don't cover the full interest due, so unpaid interest is added to the principal, increasing the overall balance.

Question 3

Which entity sets the conforming loan limits that determine whether a mortgage qualifies for purchase by Fannie Mae or Freddie Mac?

Accepted Answer

The Federal Housing Finance Agency (FHFA)

Answer

The FHFA sets annual conforming loan limits, which determine the maximum loan size eligible for purchase by Fannie Mae and Freddie Mac.

Question 4

In a mortgage context, what is 'seasoning'?

Accepted Answer

The length of time funds or a loan have been in place, often required before a refinance or sale

Answer

Seasoning refers to the required amount of time that must pass—for assets, a loan, or ownership—before certain transactions like refinancing or cash-out are permitted.

Question 5

What is the primary risk to a lender of an interest-only mortgage?

Accepted Answer

The borrower builds no equity during the interest-only period, increasing default risk if values fall

Answer

During an interest-only period, no principal is paid, so the borrower accumulates no equity; if home values decline, they may owe more than the property is worth.

Mortgage Practice Test

Mortgage Practice Test

Mortgage General Mortgage Knowledge 5