RES Real Estate Finance & Mortgages 2 — Questions and Answers
Question 1: What is a mortgage point?
- A fee equal to 1% of the loan amount paid upfront to reduce the interest rate (Correct answer)
- A unit of measurement for interest rates
- A penalty for late payments
- A bonus paid to the loan officer
Correct answer: A fee equal to 1% of the loan amount paid upfront to reduce the interest rate
Each discount point costs 1% of the loan amount and typically reduces the interest rate by about 0.25%. Paying points (buying down the rate) can save money over the life of the loan if the borrower stays long enough.
Question 2: What is a home equity line of credit (HELOC)?
- A revolving credit line secured by the borrower's home equity that can be drawn on as needed (Correct answer)
- A fixed second mortgage
- A government grant for home improvements
- A savings account for future home purchases
Correct answer: A revolving credit line secured by the borrower's home equity that can be drawn on as needed
A HELOC allows homeowners to borrow against their accumulated home equity using a revolving credit line, similar to a credit card. Interest is paid only on the amount borrowed, not the full credit limit.
Question 3: What is a debt-to-income (DTI) ratio and why do lenders use it?
- The percentage of monthly gross income that goes toward debt payments, used to assess a borrower's ability to manage mortgage payments (Correct answer)
- The total amount of debt divided by total assets
- The interest rate on the mortgage
- The ratio of property value to outstanding liens
Correct answer: The percentage of monthly gross income that goes toward debt payments, used to assess a borrower's ability to manage mortgage payments
DTI compares monthly debt obligations to gross monthly income. Lenders typically require a DTI below 43-50% to ensure borrowers can comfortably manage mortgage payments alongside other debts.
Question 4: What is refinancing a mortgage?
- Replacing an existing mortgage with a new one, typically to obtain a lower interest rate or different terms (Correct answer)
- Making extra payments on the current mortgage
- Selling the property and buying a new one
- Defaulting on the current mortgage
Correct answer: Replacing an existing mortgage with a new one, typically to obtain a lower interest rate or different terms
Refinancing pays off the existing mortgage with a new loan, often to secure a lower rate, change the loan term, switch from ARM to fixed-rate, or access equity through a cash-out refinance.
Question 5: What triggers a foreclosure?
- The borrower's failure to make mortgage payments, leading the lender to take legal action to seize and sell the property (Correct answer)
- The property increasing in value above the loan amount
- The borrower paying off the mortgage early
- A change in zoning laws affecting the property
Correct answer: The borrower's failure to make mortgage payments, leading the lender to take legal action to seize and sell the property
Foreclosure occurs when a borrower defaults on mortgage payments. The lender initiates legal proceedings to reclaim the property, sell it, and recover the outstanding loan balance.
Question 6: What is an appraisal and why is it required for a mortgage?
- A professional estimate of a property's market value required by lenders to ensure the property is worth the loan amount (Correct answer)
- An inspection of the property's structural condition
- A survey of the property's boundaries
- A review of the neighborhood's crime statistics
Correct answer: A professional estimate of a property's market value required by lenders to ensure the property is worth the loan amount
An appraisal is an independent valuation by a licensed appraiser. Lenders require it to confirm the property's value supports the loan amount, protecting against lending more than the property is worth.
RES Real Estate Finance & Mortgages 2
What is a mortgage point?