RES Real Estate Finance & Mortgages — Questions and Answers
Question 1: What is the difference between a fixed-rate and an adjustable-rate mortgage (ARM)?
- A fixed-rate mortgage maintains the same interest rate throughout the loan; an ARM rate changes periodically based on market conditions (Correct answer)
- Fixed rates are always higher than adjustable rates
- ARMs have no interest charges
- They are the same type of loan with different names
Correct answer: A fixed-rate mortgage maintains the same interest rate throughout the loan; an ARM rate changes periodically based on market conditions
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?
- The percentage of a property's value that is financed by the mortgage (Correct answer)
- The total amount of the monthly payment
- The interest rate divided by the loan term
- The ratio of the buyer's income to the loan amount
Correct answer: The percentage of a property's value that is financed by the mortgage
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)?
- Insurance required when the down payment is less than 20%, protecting the lender against borrower default (Correct answer)
- Insurance that protects the homeowner's personal property
- Flood insurance required in coastal areas
- Title insurance protecting against ownership disputes
Correct answer: Insurance required when the down payment is less than 20%, protecting the lender against borrower default
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?
- The gradual repayment of a loan through scheduled payments that include both principal and interest (Correct answer)
- The process of refinancing a mortgage
- The appreciation of property value over time
- The depreciation of a building for tax purposes
Correct answer: The gradual repayment of a loan through scheduled payments that include both principal and interest
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?
- A lender's written commitment stating the maximum loan amount a buyer qualifies for based on verified financial information (Correct answer)
- A letter from the seller accepting an offer
- A property appraisal report
- A home inspection report
Correct answer: A lender's written commitment stating the maximum loan amount a buyer qualifies for based on verified financial information
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.
Question 6: What is the difference between a conventional loan and an FHA loan?
- Conventional loans are not government-insured; FHA loans are insured by the Federal Housing Administration with lower down payment requirements (Correct answer)
- FHA loans have higher interest rates
- Conventional loans are only for first-time buyers
- There is no practical difference
Correct answer: Conventional loans are not government-insured; FHA loans are insured by the Federal Housing Administration with lower down payment requirements
Conventional loans are private-market mortgages with stricter qualification requirements. FHA loans are government-insured, allowing lower down payments (3.5%) and more flexible credit requirements, making homeownership more accessible.
RES Real Estate Finance & Mortgages
What is the difference between a fixed-rate and an adjustable-rate mortgage (ARM)?