Practice Exam #8
1. All of the following are true about the margin on an ARM, except:
A. The margin is the difference between the index value and the interest rate charged on an ARM.
B. The margin is sometimes called the spread.
C. The margin fluctuates like the index fluctuates with the cost of funds.
D. The margin is added by the lender to ensure sufficient income for administrative expenses and profit.
A. The margin is the difference between the index value and the interest rate charged on an ARM.
B. The margin is sometimes called the spread.
C. The margin fluctuates like the index fluctuates with the cost of funds.
D. The margin is added by the lender to ensure sufficient income for administrative expenses and profit.
answer
The correct answer is C. The margin usually remains fixed and is not impacted by the movement of interest rates or other factors in the financial markets.
2. All of the following are true about the rate adjustment period with ARMS, except:
A. They are regulated by statute to be every six months.
B. They could be every few months up to seven years.
C. One of the common rate adjustment periods is every year.
D. The rate could adjust every six months, but not necessarily.
A. They are regulated by statute to be every six months.
B. They could be every few months up to seven years.
C. One of the common rate adjustment periods is every year.
D. The rate could adjust every six months, but not necessarily.
answer
The correct answer is A. ARMs could have more flexibility than this.
3. The mortgage payment adjustment period occurs most often for which of the following situations:
A. Interest only loans with a hybrid adjustment period.
B. Negative amortization loans.
C. Standard ARMs.
D. Growth Equity Mortgages (GEMs).
A. Interest only loans with a hybrid adjustment period.
B. Negative amortization loans.
C. Standard ARMs.
D. Growth Equity Mortgages (GEMs).
answer
The correct answer is B. Here, the borrower’s actual principal and interest payments are recast usually for negative amortization loans.
4. A cap used with ARMs to protect the borrower from large payment increases is which of the following:
A. Interest Rate Caps.
B. Mortgage Payment Caps.
C. Negative Amortization Caps.
D. Graduated Payment Mortgage Caps
A. Interest Rate Caps.
B. Mortgage Payment Caps.
C. Negative Amortization Caps.
D. Graduated Payment Mortgage Caps
answer
The correct answer is B. This is a way lenders can limit payment shock due to interest rate changes and negative amortization.
5. Regarding negative amortization caps with ARMs, which of the following is true:
A. Negative amortization caps stop a loan from accruing negative amortization.
B. Negative amortization caps keep the loan balance from growing from deferred interest beyond the legal limit.
C. Negative amortization caps require that loan payments be recast when the cap is reached.
D. Negative amortization caps keep the loan balance from growing beyond predatory rates.
A. Negative amortization caps stop a loan from accruing negative amortization.
B. Negative amortization caps keep the loan balance from growing from deferred interest beyond the legal limit.
C. Negative amortization caps require that loan payments be recast when the cap is reached.
D. Negative amortization caps keep the loan balance from growing beyond predatory rates.
ANSWER
The correct answer is C. This is to keep the loan balance from growing beyond reach. Its time to start paying down some principal.
6. The purpose of interest rate caps regarding ARMs is which of the following:
A. To eliminate large and frequent mortgage payment increases.
B. To prevent the loan from extending beyond the legal limit.
C. To hinder predatory lending.
D. The keep the loan under 8% over prime.
A. To eliminate large and frequent mortgage payment increases.
B. To prevent the loan from extending beyond the legal limit.
C. To hinder predatory lending.
D. The keep the loan under 8% over prime.
ANSWER
The correct answer is A. This is the basic idea, so borrowers can pay the loans and resolve the debt.
7. An initial index value plus the margin equals which of the following:
A. Current index rate.
B. Current index value.
C. Fully indexed rate.
D. Maximum index rate.
A. Current index rate.
B. Current index value.
C. Fully indexed rate.
D. Maximum index rate.
ANSWER
The correct answer is C. As an example, if the initial index rate is 6.00% and the margin is 2.00%, the fully indexed rate is 8.00%.
8. An initial index value plus a lifetime cap equals which of the following:
A. Current index rate.
B. Current index value.
C. Fully indexed rate.
D. Maximum index rate.
A. Current index rate.
B. Current index value.
C. Fully indexed rate.
D. Maximum index rate.
ANSWER
The correct answer is D. For example, if the initial index rate is 5.75% and the lifetime cap is 6.25%, the maximum interest rate is 12.00%.
9. Which of the following best describes a 2/6 cap on an adjustable rate mortgage:
A. The loan can adjust the interest rate a maximum of 2% six times during the loan.
B. The loan can adjust the interest rate a maximum of 2% at any adjustment with a lifetime cap of 6% above the initial rate.
C. The loan can adjust the interest rate a maximum of 2% during a six year period.
D. The loan can adjust by 6% two times during the term of the loan.
A. The loan can adjust the interest rate a maximum of 2% six times during the loan.
B. The loan can adjust the interest rate a maximum of 2% at any adjustment with a lifetime cap of 6% above the initial rate.
C. The loan can adjust the interest rate a maximum of 2% during a six year period.
D. The loan can adjust by 6% two times during the term of the loan.
ANSWER
The correct answer is B. So if the initial rate is 6.25% and the cap is 6%, the maximum interest rate the loan could reach during the term is 12.25%. Again, the rate can adjust a maximum of 2% during any particular adjustment.
10. ARMs provide for regularly scheduled, periodic re-amortization of the loan under which of the following conditions:
A. Instead of rate caps.
B. In addition to negative amortization caps.
C. Instead of or in addition to rate caps and payment caps.
D. Any of the above.
A. Instead of rate caps.
B. In addition to negative amortization caps.
C. Instead of or in addition to rate caps and payment caps.
D. Any of the above.
ANSWER
The correct answer is D. Yes, regularly scheduled periodic re-amortization of the loan can be instead of, or in addition to, any negative amortization caps, payment caps, or rate caps.
11. Which of the following best describes the object of a convertible ARM:
A. To convert from a fixed rate loan to an adjustable.
B. To convert from an adjustable to a fixed rate loan.
C. To convert from an adjustable to a hybrid loan.
D. To convert from a fixed rate loan to a Growth Equity Mortgage (GEM).
A. To convert from a fixed rate loan to an adjustable.
B. To convert from an adjustable to a fixed rate loan.
C. To convert from an adjustable to a hybrid loan.
D. To convert from a fixed rate loan to a Growth Equity Mortgage (GEM).
ANSWER
The correct answer is B. Fixed rate loans are generally considered preferable to adjustable loans.
12. All of the following are generally true in a Conversion Option in an ARM, except:
A. The ARM often carries a higher interest rate.
B. There is a limited time to convert.
C. The conversion fee is expensive, usually several thousand dollars.
D. The initial rate and the converted rate are often higher.
A. The ARM often carries a higher interest rate.
B. There is a limited time to convert.
C. The conversion fee is expensive, usually several thousand dollars.
D. The initial rate and the converted rate are often higher.
ANSWER
The correct answer is C. The conversion fee is usually several hundred dollars, not several thousand.
13. The Consumer Handbook on Adjustable Rate Mortgages (CHARM Booklet) is prepared by which of the following agencies:
A. The Federal Agency on Adjustable Rate Mortgages (FAARM).
B. The Federal Reserve and Federal Home Loan Bank Board.
C. The Office of Thrift Supervision (OTS).
D. The Office of the Comptroller of the Currency (OCC).
A. The Federal Agency on Adjustable Rate Mortgages (FAARM).
B. The Federal Reserve and Federal Home Loan Bank Board.
C. The Office of Thrift Supervision (OTS).
D. The Office of the Comptroller of the Currency (OCC).
ANSWER
The correct answer is B. This is a statement of fact.
14. When required, the CHARM Booklet must be provided at which of the following times:
A. When the loan application is made.
B. Before the payment of any non-refundable fees.
C. Whichever occurs first between A and B.
D. Within 10 business days of receiving a completed loan application.
A. When the loan application is made.
B. Before the payment of any non-refundable fees.
C. Whichever occurs first between A and B.
D. Within 10 business days of receiving a completed loan application.
answer
The correct answer is C. This is a statement of fact.
15. The APR for an ARM that must be disclosed on the Loan Estimate and the Closing Disclosure must be based on which of the following:
A. The initial payment rate.
B. The lender’s margin.
C. The lender’s margin and the composite APR.
D. The APR is not required for an ARM because the interest rate is constantly changing.
A. The initial payment rate.
B. The lender’s margin.
C. The lender’s margin and the composite APR.
D. The APR is not required for an ARM because the interest rate is constantly changing.
answer
The correct answer is C. The composite APR is based on the initial payment rate and the fully indexed rate that would exist for the remaining years on the loan term.
16. According to TILA, when must any notice of change in payment or interest rate be provided to a borrower?
A. At least 30 days before a new payment takes effect.
B. Not earlier than 125 days before a new payment takes effect.
C. Both A and B.
D. At least 25 days before and not earlier than 120 days before a new payment takes effect.
A. At least 30 days before a new payment takes effect.
B. Not earlier than 125 days before a new payment takes effect.
C. Both A and B.
D. At least 25 days before and not earlier than 120 days before a new payment takes effect.
answer
The correct answer is D. The lender must also provide the borrower with an example, based on a $10,000 loan, showing how the payments and loan balance will be affected by changes in the index used.
17. A Payment Option ARM would allow borrowers which of the following choices:
A. To choose a traditional payment of principal and interest.
B. To choose an interest only payment.
C. To choose a minimum payment that could be less than interest only.
D. Any of the above.
A. To choose a traditional payment of principal and interest.
B. To choose an interest only payment.
C. To choose a minimum payment that could be less than interest only.
D. Any of the above.
answer
The correct answer is D. Yes, any of these options would be available on a Payment Option ARM.
18. A Hybrid ARM is closest to which of the following:
A. It is interest only for a certain number of years, then fixed for the remainder of the term.
B. It is fixed for a certain number of years, then interest only for the remainder of the term.
C. It is fixed for a certain number of years, then the interest rate adjusts for the remainder of the term until the debt is liquidated.
D. It is interest only for a certain number of years, then adjustable for the remainder of the term.
A. It is interest only for a certain number of years, then fixed for the remainder of the term.
B. It is fixed for a certain number of years, then interest only for the remainder of the term.
C. It is fixed for a certain number of years, then the interest rate adjusts for the remainder of the term until the debt is liquidated.
D. It is interest only for a certain number of years, then adjustable for the remainder of the term.
answer
The correct answer is C. This is the way a Hybrid ARM works. For example, a 3/27 ARM means the interest rate is fixed for 3 years, and adjusts for the remaining 27 years of the term until the loan is paid off.
19. All of the following are true about interest rate buydowns, except:
A. A buydown refers to discount points.
B. Buydowns must be paid by the seller.
C. A discount point is one percent of the loan amount.
D. A buydown lowers the payment for the borrower.
A. A buydown refers to discount points.
B. Buydowns must be paid by the seller.
C. A discount point is one percent of the loan amount.
D. A buydown lowers the payment for the borrower.
answer
The correct answer is B. A buydown can be paid by the buyer or seller, or even the builder or developer.
20. All of the following are true about interest rate buydowns, except:
A. A buydown is prepaid interest.
B. A buydown is the commission the MLO makes on the loan.
C. A buydown is only for a limited period of time.
D. A buydown could be for the full term of the loan.
A. A buydown is prepaid interest.
B. A buydown is the commission the MLO makes on the loan.
C. A buydown is only for a limited period of time.
D. A buydown could be for the full term of the loan.
answer
The correct answer is B. The commission the MLO makes on the loan is part of the agreed upon fees made by the lender and broker, not discount points. A buydown for the full term of the loan (D) would be called a permanent buydown.
21. One main advantage to a buydown plan is which of the following:
A. The lender may qualify the borrower on the basis of the reduced payments after the buydown.
B. The buydown shows as a charge to the seller on the Loan Estimate and Closing Disclosure.
C. The borrower’s monthly payment is lower throughout the term of the loan.
D. The lender can require that the seller provide the funds for the buydown, saving the borrower additional cash.
A. The lender may qualify the borrower on the basis of the reduced payments after the buydown.
B. The buydown shows as a charge to the seller on the Loan Estimate and Closing Disclosure.
C. The borrower’s monthly payment is lower throughout the term of the loan.
D. The lender can require that the seller provide the funds for the buydown, saving the borrower additional cash.
answer
The correct answer is A. The correct answer is A. If this happens, it definitely makes it easier for the borrower to qualify.
22. Which of the following is a false statement regarding buydown plans:
A. A buydown shows as a charge to the borrower on the Loan Estimate and Closing Disclosure.
B. Buydown plans can be temporary or permanent.
C. When discount points enter the equation, qualifying standards are more stringent for the borrower.
D. Discount points are considered prepaid interest to the lender.
A. A buydown shows as a charge to the borrower on the Loan Estimate and Closing Disclosure.
B. Buydown plans can be temporary or permanent.
C. When discount points enter the equation, qualifying standards are more stringent for the borrower.
D. Discount points are considered prepaid interest to the lender.
answer
The correct answer is C. The correct answer is C. On the contrary, the lender may qualify the borrower on the basis of the smaller monthly payment.
23. A borrower is obtaining a loan for $200,000 at 7% for 30 years. If the seller agrees to pay discount points to buy down the interest rate to 6% for the first 3 years, the amount of money the borrower saves in P & I for the first 3 years is closest to which of the following:
A. $2867.00.
B. $3689.00.
C. $4733.00.
D. $5862.00.
A. $2867.00.
B. $3689.00.
C. $4733.00.
D. $5862.00.
answer
The correct answer is C. P & I @ 7% = $1330.60/mo. P & I @ 6% = $1199.10/mo. $1330 - $1199 = $131/mo. X 36 months = $4716. Don’t worry. You can’t solve this without a financial calculator, so you won’t have this on the test, but it is a good concept to understand. This is for illustration purposes only, just like the Hondros textbook offers such examples.
24. A borrower is obtaining a loan for $200,000 at 7% for 30 years. If the seller agrees to pay discount points to buy down the interest rate to 6% for the first three years, and taxes and insurance on the new house amount to $322/mo combined, how much money will the borrower have to make on a monthly basis to qualify for a conventional loan at the buydown rate?
A. $3689.00.
B. $4752.00.
C. $5094.00.
D. $5432.00.
A. $3689.00.
B. $4752.00.
C. $5094.00.
D. $5432.00.
answer
The correct answer is D. $200,000 amortized at 6% for 30 years = $1199/mo. Add $322 for taxes and insurance = $1521/mo PITI. Front end ratio is 28%. This means monthly housing expense ratio in relation to gross monthly income. So, $1521 ÷ 28% = $5432. Borrower qualifies at the introductory rate. Figures are rounded.
25. If the seller agrees to buy down the interest rate for the buyer, who determines how much money needs to be paid for the buydown?
A. The Feds.
B. It is regulated by the Office of the Comptroller of the Currency, (OCC).
C. The lender.
D. It is what the buyer and seller agree upon.
A. The Feds.
B. It is regulated by the Office of the Comptroller of the Currency, (OCC).
C. The lender.
D. It is what the buyer and seller agree upon.
answer
The correct answer is C. Yes, the lender decides how much money it will take to buy down the interest rate for a designated period of time.
26. All of the following are true regarding a seller-paid buydown, except:
A. The seller writes a check to the lender for the amount required for the buydown.
B. The lender subtracts the amount of the buydown from the seller’s proceeds.
C. The buyer signs a note for the full amount due the lender.
D. The lender deducts the right amount from the proceeds advanced to the borrower.
A. The seller writes a check to the lender for the amount required for the buydown.
B. The lender subtracts the amount of the buydown from the seller’s proceeds.
C. The buyer signs a note for the full amount due the lender.
D. The lender deducts the right amount from the proceeds advanced to the borrower.
answer
The correct answer is D. Yes, this does not happen.
27. A borrower is looking for a permanent buydown. The lender states that on a $100,000 loan one discount point ($1,000) buys the interest rate down 0.125%. The borrower pays two discount points. The interest rate was going to be 6.75%. What will be the new interest rate?
A. 6.75%.
B. 6.5%.
C. 6.25%.
D. 6.0%.
A. 6.75%.
B. 6.5%.
C. 6.25%.
D. 6.0%.
answer
The correct answer is B. 0.125% + 0.125% = 0.25%. 6.76% - 0.25% = 6.5%.
28. A borrower is looking for a permanent buydown. The lender states that on a $100,000 loan one discount point ($1,000) buys the interest rate down 0.125%. The borrower pays two discount points. If the interest rate goes from 7.0% to 6.75%, how much money is saved annually on principal and interest:
A. $156.20.
B. $200.40.
C. $656.60.
D. $2,010.00.
A. $156.20.
B. $200.40.
C. $656.60.
D. $2,010.00.
answer
The correct answer is B. At 7%, P&I on $100,000 for 30 years is $665.30/mo. At 6.75%, P&I on $100,000 for 30 years is $648.60. $665.30 - $648.60 = $16.70 x 12 = $200.40.
29. With a temporary buydown, underwriters will qualify a borrower using what rate of interest?
A. The starting rate.
B. The note rate.
C. COFI.
D. LIBOR.
A. The starting rate.
B. The note rate.
C. COFI.
D. LIBOR.
answer
The correct answer is B. Underwriters must be conservative and they are usually not willing to qualify the borrower at the starting rate for an interest rate reduction that may last only two or three years. They must use the note rate.
30. A loan with a temporary buydown is classified as which of the following:
A. A fixed rate loan.
B. A conventional loan.
C. A nontraditional loan.
D. A conforming loan.
A. A fixed rate loan.
B. A conventional loan.
C. A nontraditional loan.
D. A conforming loan.
answer
The correct answer is C. Because it has different interest rates, it is considered a nontraditional loan.
31. Which of the following best describes a level payment buydown plan:
A. A buydown plan that reduces the interest rate throughout the term of the loan.
B. A buydown plan where the reduction remains constant throughout the buydown period.
C. A buydown plan where the interest rate is reduced for at least two years of the term.
D. A buydown plan where the interest changes only one time during the buydown period.
A. A buydown plan that reduces the interest rate throughout the term of the loan.
B. A buydown plan where the reduction remains constant throughout the buydown period.
C. A buydown plan where the interest rate is reduced for at least two years of the term.
D. A buydown plan where the interest changes only one time during the buydown period.
answer
The correct answer is B. Yes, this describes a level payment buydown plan.
32. Which of the following best describes a graduated payment buydown plan:
A. A buydown plan that reduces the interest throughout the term of the loan.
B. A buydown plan where payments in the early years are subsidized by prepaid interest.
C. A buydown plan where payments start low but increase each year until they’re sufficient to amortize the loan.
D. A buydown plan where the interest rate is reduced for at least three years of the loan.
A. A buydown plan that reduces the interest throughout the term of the loan.
B. A buydown plan where payments in the early years are subsidized by prepaid interest.
C. A buydown plan where payments start low but increase each year until they’re sufficient to amortize the loan.
D. A buydown plan where the interest rate is reduced for at least three years of the loan.
answer
The correct answer is C. Hence the term graduated payment buydown plan.
33. A lender makes a loan for $220,000 at 7% interest for 30 years. Some interest is prepaid for three years, reducing the interest rate for those three years to 6%. Which of the following best describes this type of loan:
A. Level payment buydown.
B. Graduated payment buydown.
C. Reverse mortgage.
D. Fixed rate conventional.
A. Level payment buydown.
B. Graduated payment buydown.
C. Reverse mortgage.
D. Fixed rate conventional.
answer
The correct answer is A. The first three years the interest rate is reduced the same one percent, hence a level payment buydown.
34. A 3-2-1 buydown is best described as which of the following types of loans:
A. Level payment buydown.
B. Graduated payment buydown.
C. Reverse mortgage.
D. Fixed rate conventional.
A. Level payment buydown.
B. Graduated payment buydown.
C. Reverse mortgage.
D. Fixed rate conventional.
answer
The correct answer is B. The interest rate is reduced by 2.5% the first year, 2% the second year, and 1.5% the third year, gradually attaining the fully indexed rate.
35. Subsidies for graduated payment buydowns can come from which of the following sources:
A. Extra money from a buyer’s upfront cash deposit in escrow.
B. A seller’s reduced proceeds from escrow.
C. A builder’s deposit of cash or reduced proceeds.
D. Any of these.
A. Extra money from a buyer’s upfront cash deposit in escrow.
B. A seller’s reduced proceeds from escrow.
C. A builder’s deposit of cash or reduced proceeds.
D. Any of these.
answer
The correct answer is D. Yes, any of these can be the source of subsidies for prepaid interest.
36. If a subsidy paid by a builder to prepay interest buys the interest rate down 3% for three years, at which of the following rates will the borrower usually qualify:
A. At the current market interest rates at th
e time of closing.
B. At 1% below the current market interest rates.
C. At 2% below the current market interest rates.
D. At 3% below the current market interest rates.
A. At the current market interest rates at th
e time of closing.
B. At 1% below the current market interest rates.
C. At 2% below the current market interest rates.
D. At 3% below the current market interest rates.
answer
The correct answer is C. Yes, this is usually the lowest qualifying rate a lender will allow under these circumstances.
37. How will a buydown show on the Loan Estimate?
A. As a charge to the borrower.
B. As a credit to the borrower.
C. As a charge to the seller.
D. As a credit to the seller.
A. As a charge to the borrower.
B. As a credit to the borrower.
C. As a charge to the seller.
D. As a credit to the seller.
answer
The correct answer is A. This is true if the borrower pays the discount points to buy the loan down.
38. All of the following statements are true regarding a permanent buydown, except:
A. A permanent buydown reduces the interest rate for the entire life of the loan.
B. A permanent buydown reduces the payment for the entire life of the loan.
C. Even though it is a permanent buydown, the lender is unable to write the reduced interest rate into the note.
D. The nominal rate stated in the note will be the actual reduced interest rate.
A. A permanent buydown reduces the interest rate for the entire life of the loan.
B. A permanent buydown reduces the payment for the entire life of the loan.
C. Even though it is a permanent buydown, the lender is unable to write the reduced interest rate into the note.
D. The nominal rate stated in the note will be the actual reduced interest rate.
answer
The correct answer is C. The lender does write the reduced rate based on the buydown into the note.
39. Which of the following best describes a reverse mortgage:
A. Debt increases while equity decreases.
B. Debt decreases while equity increases.
C. Recourse for the loan falls only upon heirs, not the owners.
D. Payments to the borrower stop if the loan balance will be more than the value of the collateral.
A. Debt increases while equity decreases.
B. Debt decreases while equity increases.
C. Recourse for the loan falls only upon heirs, not the owners.
D. Payments to the borrower stop if the loan balance will be more than the value of the collateral.
answer
The correct answer is A. Yes, this is the reason heirs sometimes object to their senior parents taking out a reverse mortgage.
40. The minimum age for all owners on title to obtain a reverse mortgage is which of the following:
A. 60.
B. 62.
C. 65.
D. 68.
A. 60.
B. 62.
C. 65.
D. 68.
answer
The correct answer is B. Yes, the minimum age is 62.
41. To obtain a reverse mortgage, if one of the owners is 64 and the other is 60, how must they proceed to obtain the loan?
A. They would have to wait two years.
B. The younger borrower would have to be removed from title.
C. They would have to seek a waiver from HUD.
D. They would have to consent to a higher interest rate.
A. They would have to wait two years.
B. The younger borrower would have to be removed from title.
C. They would have to seek a waiver from HUD.
D. They would have to consent to a higher interest rate.
answer
The correct answer is B.
42. Which of the following would be considered a legitimate purpose for using the proceeds from a reverse mortgage:
A. To pay off debt.
B. For a vacation.
C. Home repairs and upkeep.
D. Any of the above.
A. To pay off debt.
B. For a vacation.
C. Home repairs and upkeep.
D. Any of the above.
answer
The correct answer is D. Yes, there are no restrictions on how the proceeds can be used.