Mortgage General Mortgage Knowledge 5 â Questions and Answers
Question 1: What is a 'cash-out refinance'?
- Refinancing to eliminate PMI without taking extra funds
- Replacing an existing mortgage with a larger loan and receiving the difference in cash (Correct answer)
- Paying closing costs in cash instead of rolling them into the loan
- Refinancing a home equity loan back into the primary mortgage
Correct answer: Replacing an existing mortgage with a larger loan and receiving the difference in cash
A cash-out refinance replaces the existing mortgage with a new, larger loan, and the borrower receives the difference between the two loan amounts as cash.
Question 2: What does 'negative amortization' mean?
- Paying more than the minimum payment each month
- A loan balance that decreases faster than scheduled
- When monthly payments are insufficient to cover interest, causing the loan balance to increase (Correct answer)
- Refinancing at a higher interest rate
Correct answer: When monthly payments are insufficient to cover interest, causing the loan balance to increase
Negative amortization occurs when minimum payments don't cover the full interest due, so unpaid interest is added to the principal, increasing the overall balance.
Question 3: Which entity sets the conforming loan limits that determine whether a mortgage qualifies for purchase by Fannie Mae or Freddie Mac?
- The Federal Reserve
- The Consumer Financial Protection Bureau (CFPB)
- The Federal Housing Finance Agency (FHFA) (Correct answer)
- The Department of Housing and Urban Development (HUD)
Correct answer: The Federal Housing Finance Agency (FHFA)
The FHFA sets annual conforming loan limits, which determine the maximum loan size eligible for purchase by Fannie Mae and Freddie Mac.
Question 4: In a mortgage context, what is 'seasoning'?
- The time a borrower must wait between applying for two different loans
- The length of time funds or a loan have been in place, often required before a refinance or sale (Correct answer)
- Adjustments made to the interest rate based on the season
- The period during which a rate lock is valid
Correct answer: The length of time funds or a loan have been in place, often required before a refinance or sale
Seasoning refers to the required amount of time that must passâfor assets, a loan, or ownershipâbefore certain transactions like refinancing or cash-out are permitted.
Question 5: What is the primary risk to a lender of an interest-only mortgage?
- The borrower may pay off the loan too quickly
- The borrower builds no equity during the interest-only period, increasing default risk if values fall (Correct answer)
- Interest-only payments are difficult to calculate
- The lender cannot sell the loan on the secondary market
Correct answer: The borrower builds no equity during the interest-only period, increasing default risk if values fall
During an interest-only period, no principal is paid, so the borrower accumulates no equity; if home values decline, they may owe more than the property is worth.
Question 6: What is a 'due-on-sale' clause in a mortgage?
- A provision requiring the lender to lower the rate if the property is sold
- A clause that requires the full loan balance to be repaid when the property is sold or transferred (Correct answer)
- A penalty assessed when the home sells for less than appraised value
- A requirement for the buyer to purchase title insurance
Correct answer: A clause that requires the full loan balance to be repaid when the property is sold or transferred
A due-on-sale (acceleration) clause requires the borrower to repay the full mortgage balance when the home is sold or ownership is transferred, preventing unauthorized assumptions.
Question 7: Which government-sponsored enterprise (GSE) primarily focuses on securitizing mortgages originated by savings institutions rather than commercial banks?
- Fannie Mae (FNMA)
- Freddie Mac (FHLMC) (Correct answer)
- Ginnie Mae (GNMA)
- The Federal Home Loan Bank
Correct answer: Freddie Mac (FHLMC)
Freddie Mac (Federal Home Loan Mortgage Corporation) was created to expand the secondary mortgage market specifically for mortgages originated by thrifts and savings institutions.
Mortgage General Mortgage Knowledge 5
What is a 'cash-out refinance'?