Mortgage General Mortgage Knowledge 2 — Questions and Answers
Question 1: What is the purpose of an escrow account in a mortgage?
- To hold the deed until the loan is paid off
- To collect and pay property taxes and insurance on the borrower's behalf (Correct answer)
- To store the down payment during closing
- To fund home repairs required by the lender
Correct answer: To collect and pay property taxes and insurance on the borrower's behalf
Escrow accounts collect monthly contributions from borrowers so the lender can pay property taxes and homeowner's insurance when they come due.
Question 2: What does PMI stand for in the context of a mortgage?
- Primary Mortgage Index
- Private Mortgage Insurance (Correct answer)
- Property Management Insurance
- Pre-approval Mortgage Indicator
Correct answer: Private Mortgage Insurance
PMI (Private Mortgage Insurance) protects the lender if the borrower defaults and is typically required when the down payment is less than 20%.
Question 3: Which loan type is insured by the Federal Housing Administration and typically requires a lower down payment?
- Conventional loan
- VA loan
- FHA loan (Correct answer)
- USDA loan
Correct answer: FHA loan
FHA loans are government-backed mortgages that allow down payments as low as 3.5% and are more accessible to borrowers with lower credit scores.
Question 4: What is a balloon mortgage?
- A mortgage with increasing payments over time
- A loan with low or interest-only payments followed by a large lump-sum payment at the end (Correct answer)
- A mortgage that adjusts annually based on inflation
- A short-term bridge loan for moving expenses
Correct answer: A loan with low or interest-only payments followed by a large lump-sum payment at the end
A balloon mortgage features relatively low initial payments but requires a large lump-sum payment (the 'balloon') when the loan term ends.
Question 5: What is the 'principal' of a mortgage loan?
- The total interest paid over the loan's life
- The monthly payment amount
- The original amount borrowed, excluding interest (Correct answer)
- The lender's fee for originating the loan
Correct answer: The original amount borrowed, excluding interest
Principal refers to the original loan amount borrowed, which decreases as payments are made over time.
Question 6: What does 'amortization' mean in mortgage terms?
- Paying off a loan through regular scheduled payments over time (Correct answer)
- The process of increasing a mortgage's interest rate annually
- Refinancing a loan at a lower rate
- Transferring a mortgage to another borrower
Correct answer: Paying off a loan through regular scheduled payments over time
Amortization is the gradual repayment of a mortgage through fixed periodic payments that cover both principal and interest.
Question 7: Which document gives the borrower a detailed breakdown of all closing costs at least three business days before closing?
- Good Faith Estimate
- HUD-1 Settlement Statement
- Closing Disclosure (Correct answer)
- Mortgage Commitment Letter
Correct answer: Closing Disclosure
The Closing Disclosure, required under TRID rules, provides a final itemized list of loan terms and closing costs at least three business days before the closing date.
Mortgage General Mortgage Knowledge 2
What is the purpose of an escrow account in a mortgage?