Mortgage Terms 2 — Questions and Answers
Question 1: What is 'negative amortization' in a mortgage?
- Paying off the loan ahead of schedule
- When monthly payments are less than the interest owed, causing the loan balance to grow (Correct answer)
- A penalty charged for early payoff
- A type of balloon payment at loan maturity
Correct answer: When monthly payments are less than the interest owed, causing the loan balance to grow
Negative amortization occurs when minimum payments don't cover accruing interest, so the unpaid interest is added to the principal balance.
Question 2: What does 'LTV' stand for in mortgage lending?
- Long-Term Value
- Loan-To-Value ratio (Correct answer)
- Liability Transfer Value
- Lender's Total Valuation
Correct answer: Loan-To-Value ratio
LTV (Loan-To-Value) is the ratio of the loan amount to the appraised property value, expressed as a percentage.
Question 3: What is a 'due-on-sale' clause in a mortgage?
- A clause requiring the lender to sell the loan on the secondary market
- A provision requiring the full loan balance to be paid when the property is sold or transferred (Correct answer)
- A fee charged when the property appreciates in value
- A requirement to pay taxes when the home is sold
Correct answer: A provision requiring the full loan balance to be paid when the property is sold or transferred
A due-on-sale clause (also called an acceleration clause) requires the borrower to pay off the remaining mortgage balance when the property is sold or ownership is transferred.
Question 4: What is 'title insurance' in the context of a mortgage?
- Insurance that covers the home's physical structure
- Insurance that protects against losses from defects or disputes in the property's ownership history (Correct answer)
- Insurance that pays the mortgage if the borrower dies
- Insurance that covers the lender against interest rate changes
Correct answer: Insurance that protects against losses from defects or disputes in the property's ownership history
Title insurance protects the buyer and/or lender from financial loss due to defects in a property's title, such as liens or ownership disputes from before the purchase.
Question 5: In mortgage terms, what is a 'rate cap'?
- The maximum interest rate a lender is allowed to charge by law
- A limit on how much an adjustable-rate mortgage's interest rate can change in a given period or over the loan's life (Correct answer)
- The minimum credit score required to qualify for a loan
- A fee charged when the interest rate rises above market average
Correct answer: A limit on how much an adjustable-rate mortgage's interest rate can change in a given period or over the loan's life
A rate cap limits how much an ARM's interest rate can increase per adjustment period and/or over the life of the loan, protecting borrowers from unlimited rate increases.
Question 6: What is a 'jumbo loan'?
- A mortgage with a term longer than 30 years
- A mortgage that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac (Correct answer)
- A loan that covers multiple properties at once
- A mortgage with a very large down payment requirement
Correct answer: A mortgage that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac
A jumbo loan is a mortgage that exceeds the conforming loan limits established by the FHFA, making it ineligible for purchase by Fannie Mae or Freddie Mac.
Question 7: What is 'private mortgage insurance' (PMI) typically required for?
- All conventional loans regardless of down payment
- Conventional loans where the down payment is less than 20% of the home's purchase price (Correct answer)
- FHA loans only
- VA loans for military veterans
Correct answer: Conventional loans where the down payment is less than 20% of the home's purchase price
PMI is required on conventional loans when the borrower puts less than 20% down, protecting the lender if the borrower defaults.
Mortgage Terms 2
What is 'negative amortization' in a mortgage?