CMC Mortgage Products and Practices 2 — Questions and Answers
Question 1: Which loan feature allows a borrower to convert from an adjustable rate to a fixed rate without refinancing?
- Prepayment privilege
- Conversion option (Correct answer)
- Rate cap provision
- Assumability clause
Correct answer: Conversion option
A conversion option in an ARM allows the borrower to switch to a fixed rate at specified times without a full refinance.
Question 2: What is the primary purpose of a piggyback loan (80-10-10)?
- To obtain a lower interest rate on the first mortgage
- To avoid paying private mortgage insurance (Correct answer)
- To qualify for a government-backed loan
- To extend the repayment term
Correct answer: To avoid paying private mortgage insurance
An 80-10-10 piggyback combines an 80% first mortgage and 10% second mortgage so the borrower avoids PMI with only 10% down.
Question 3: A balloon mortgage with a 5/25 structure means the loan has:
- A 5-year fixed rate then 25-year ARM
- Payments amortized over 25 years with full balance due in 5 years (Correct answer)
- A 5% rate cap and 25-year term
- 5 years interest-only then 25 years fully amortizing
Correct answer: Payments amortized over 25 years with full balance due in 5 years
A 5/25 balloon is amortized as a 25-year loan but the remaining balance becomes due in full after 5 years.
Question 4: Which index is commonly used for adjusting rates on Home Equity Lines of Credit (HELOCs)?
- 10-Year Treasury Constant Maturity
- Prime Rate (Correct answer)
- LIBOR
- COFI
Correct answer: Prime Rate
HELOCs are typically indexed to the Prime Rate, which moves with the federal funds rate.
Question 5: Under the TRID rule, when must the Loan Estimate be delivered to the borrower?
- Within 3 business days of receiving a complete loan application (Correct answer)
- At the time of loan approval
- Before the appraisal is ordered
- Within 5 calendar days of application
Correct answer: Within 3 business days of receiving a complete loan application
TRID requires the Loan Estimate to be provided within 3 business days of receiving the six triggering pieces of application information.
Question 6: A graduated payment mortgage (GPM) is best suited for borrowers who:
- Expect their income to decrease over time
- Want the lowest possible monthly payment throughout the loan
- Anticipate income growth and can accept negative amortization early on (Correct answer)
- Are purchasing an investment property
Correct answer: Anticipate income growth and can accept negative amortization early on
GPMs start with lower payments that increase over time; early payments may not cover all interest, causing negative amortization.
Question 7: Which statement about interest-only (IO) loans is accurate?
- Principal is reduced evenly each month during the IO period
- The borrower builds no equity through payments during the IO period (Correct answer)
- IO loans are prohibited under QM rules
- Monthly payments remain constant for the life of the loan
Correct answer: The borrower builds no equity through payments during the IO period
During the interest-only period, payments cover only interest, so no principal is paid down and equity is not built through loan payments.
CMC Mortgage Products and Practices 2
Which loan feature allows a borrower to convert from an adjustable rate to a fixed rate without refinancing?