Mortgage Mortgage Terms Question and Answers 2

Question 1

What does the term 'escrow' refer to in a mortgage context?

Accepted Answer

A third-party account that holds funds for taxes and insurance

Answer

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?

Accepted Answer

A large lump-sum payment due at the end of the loan term

Answer

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?

Accepted Answer

The ratio of the loan amount to the appraised value of the property

Answer

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?

Accepted Answer

Conventional loans with a down payment of less than 20%

Answer

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?

Accepted Answer

The process of gradually paying off a loan through scheduled payments of principal and interest

Answer

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.

Mortgage Practice Test