PSI Real Estate Financing MCQ 3

Question 1

What is the primary purpose of private mortgage insurance (PMI) on a conventional loan?

Accepted Answer

It protects the lender against borrower default when LTV exceeds 80%

Answer

PMI protects the lender—not the borrower—against financial loss if the borrower defaults when the loan-to-value ratio is above 80%.

Question 2

Under the Homeowners Protection Act, a borrower with a conventional loan can request cancellation of PMI when the LTV ratio reaches:

Accepted Answer

80%

Answer

Borrowers can request PMI cancellation once the LTV reaches 80% based on original value; lenders must automatically cancel it at 78%.

Question 3

A mortgage that allows the interest rate to adjust periodically based on a market index is called a(n):

Accepted Answer

Adjustable-rate mortgage (ARM)

Answer

An adjustable-rate mortgage (ARM) has an interest rate that changes at set intervals based on a specified index plus a margin.

Question 4

Which type of mortgage is specifically designed for senior homeowners to convert home equity into cash without monthly payments?

Accepted Answer

Reverse mortgage

Answer

A reverse mortgage allows homeowners aged 62 or older to borrow against home equity; repayment is deferred until the borrower sells, moves, or dies.

Question 5

In real estate financing, what does the term 'amortization' refer to?

Accepted Answer

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

Answer

Amortization is the systematic reduction of a loan balance through periodic payments that cover both interest and principal.

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