RES Real Estate Finance & Mortgages

Question 1

What is the difference between a fixed-rate and an adjustable-rate mortgage (ARM)?

Accepted Answer

A fixed-rate mortgage maintains the same interest rate throughout the loan; an ARM rate changes periodically based on market conditions

Answer

Fixed-rate mortgages lock in a constant interest rate for the entire loan term, providing payment predictability. ARMs start with a lower introductory rate that adjusts periodically based on a benchmark index.

Question 2

What is a loan-to-value (LTV) ratio?

Accepted Answer

The percentage of a property's value that is financed by the mortgage

Answer

LTV is calculated by dividing the mortgage amount by the property's appraised value. An 80% LTV means the buyer is financing 80% of the value. Higher LTVs typically require private mortgage insurance (PMI).

Question 3

What is private mortgage insurance (PMI)?

Accepted Answer

Insurance required when the down payment is less than 20%, protecting the lender against borrower default

Answer

PMI protects the lender (not the borrower) when the borrower puts down less than 20% of the purchase price. It can be cancelled once the LTV reaches 80% through payments or appreciation.

Question 4

What is amortization in mortgage lending?

Accepted Answer

The gradual repayment of a loan through scheduled payments that include both principal and interest

Answer

Amortization is the process of paying off a loan over time through regular payments. Early payments are mostly interest; as the principal decreases, a larger portion of each payment goes toward principal.

Question 5

What is a pre-approval letter?

Accepted Answer

A lender's written commitment stating the maximum loan amount a buyer qualifies for based on verified financial information

Answer

A pre-approval letter shows sellers that a buyer has been evaluated by a lender and qualifies for financing up to a specified amount, strengthening the buyer's offer in competitive markets.

RES - Real Estate Salesperson Exam Practice Test

RES - Real Estate Salesperson Exam Practice Test

RES Real Estate Finance & Mortgages