Loan Interest Rates & Pricing Quiz
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Questions and Answers

What is the primary purpose of a Two-One Buy-Down plan?

  • To guarantee a loan without any down payment
  • To eliminate mortgage payments for the first two years
  • To reduce the borrower's payments during the first two years of a mortgage (correct)
  • To increase the loan amount available to borrowers

    • Who typically provides the funds to set up the escrow account in a Two-One Buy-Down?

  • The seller or builder as a sales incentive (correct)
  • The borrower themselves
  • The lender issuing the mortgage
  • A government agency

    • What does a USDA Mortgage offer to eligible borrowers?

  • Guaranteed loans for urban properties
  • Flexible interest rates based on credit score
  • No down payment for rural home purchases (correct)
  • Low interest rates with a 5% down payment

    • What defines the VA Entitlement amount for a veteran?

    <p>The amount guaranteed for a loan in case of default</p> Signup and view all the answers

    What is a Yield Spread Premium?

    <p>Compensation paid to a mortgage broker for a higher interest rate</p> Signup and view all the answers

    What is the Par Rate in lending?

    <p>The interest rate for a loan without lender credits or discount points.</p> Signup and view all the answers

    What does Payment Shock refer to?

    <p>A significant increase in the monthly payment that may lead to default.</p> Signup and view all the answers

    Which statement accurately describes Premium Pricing?

    <p>It allows the borrower to reduce upfront costs by accepting a higher interest rate.</p> Signup and view all the answers

    What are Prepaids in the context of mortgages?

    <p>Upfront payments made for mortgage-related expenses at closing.</p> Signup and view all the answers

    What is a Prepayment Penalty?

    <p>A fee imposed for partially or fully paying off a mortgage before the due date.</p> Signup and view all the answers

    Which entities are part of the Primary Mortgage Market?

    <p>Depository institutions and non-depository mortgage bankers.</p> Signup and view all the answers

    When is Private Mortgage Insurance (PMI) typically required?

    <p>When the borrower makes a down payment of less than 20%.</p> Signup and view all the answers

    How do prepayment penalties affect a mortgage loan's saleability in the secondary market?

    <p>They typically make loans less saleable in the secondary market.</p> Signup and view all the answers

    What defines a Qualified Mortgage?

    <p>It meets specific criteria for ability to repay.</p> Signup and view all the answers

    What is the primary function of a Rate Lock Agreement?

    <p>To guarantee a specific interest rate for a limited time.</p> Signup and view all the answers

    Which of the following describes a Rebuttable Presumption in Qualified Mortgages?

    <p>It assumes the borrower can repay the loan unless proven otherwise.</p> Signup and view all the answers

    What could trigger a repurchase demand for a loan?

    <p>Material underwriting errors detected after closing.</p> Signup and view all the answers

    What is meant by Safe Harbor in the context of Qualified Mortgages?

    <p>A loan that satisfies all ATR requirements.</p> Signup and view all the answers

    What best describes the Secondary Market?

    <p>A place where existing loans are bought and sold by organizations.</p> Signup and view all the answers

    What is a Subordinate Loan?

    <p>Any loan not in the first lien position.</p> Signup and view all the answers

    What does Table Funding enable brokers to do?

    <p>To close loans in their name using a funding lender.</p> Signup and view all the answers

    Which of the following best describes a Subprime Mortgage?

    <p>It includes high-interest rates and limited documentation.</p> Signup and view all the answers

    What does the term 'Tolerances' refer to in a Loan Estimate?

    <p>The acceptable amount by which settlement costs can exceed estimates.</p> Signup and view all the answers

    What occurs during the settlement phase of a home purchase transaction?

    <p>Ownership of the property is legally transferred.</p> Signup and view all the answers

    In what situation would a Subordination Agreement be necessary?

    <p>When a borrower wants to refinance the first mortgage while having a subordinate loan.</p> Signup and view all the answers

    What is the purpose of the Total Annual Loan Cost (TALC) table?

    <p>To provide an estimate of costs based on various scenarios.</p> Signup and view all the answers

    Study Notes

    Loan Interest Rates & Pricing

    • Par Rate: Interest rate for a loan without lender credits or discount points.
    • Premium Pricing: Lender credit paid to the borrower for accepting a higher interest rate. Opposite of discount.
    • Yield Spread Premium: Money paid by lenders to brokers for rates above par.

    Loan Payment & Risk

    • Payment Shock: Large increase in monthly payments, potentially causing defaults. Important factor in mortgage risk assessment.
    • Prepayment Penalty: Fee charged for paying a mortgage early, often a percentage of the principal. Rare now, often used in subprime adjustable-rate loans.
    • Subprime Mortgage: Loans for borrowers with limited credit, often featuring low introductory rates followed by variable rates or high increases, limited/no income documentation, frequent refinances for affordability, and prepayment penalties.

    Loan Origination & Secondary Market

    • Primary Mortgage Market: Institutions (banks, mortgage bankers) that directly lend to borrowers.
    • Secondary Market: Organizations (Fannie Mae, Ginnie Mae, Freddie Mac) buying existing loans and packaging them into securities.
    • Repurchase: If a loan is found to be deficient (fraud, errors) after sale, the seller must buy it back.
    • Servicing Transfers: When servicing rights to loans are sold to a different company. Borrowers usually pay the new servicing company.

    Closing Costs & Related Terms

    • Prepaids: Upfront cash payments at closing for expenses like insurance, taxes, and interest, often to establish an escrow account.
    • Closing Cost Concessions (Seller Concessions): Seller or builder payments to lower buyer closing costs, including escrow account funding.
    • Settlement: Final stage of home purchase transaction, transferring ownership and disbursing funds.
    • Title: Legal right of ownership to property.
    • Tolerances: Allowed differences between estimated and actual settlement costs.
    • Table Funding: Funding a loan originated by a broker, with funds disbursed at closing table.

    Loan Types & Features

    • Qualified Mortgage (QM): Loans meeting lower-risk criteria, including ability to repay, no negative amortization, no balloon payments or interest-only features, and limitations on APR/fees.
    • Rebuttable Presumption: QM category if APR exceeds average prime by 1.5-2.25%, with borrower ability to contest.
    • Subordinate Loan: Not the first lien on a property, second in line for payment in case of foreclosure.
    • USDA Mortgage: Zero-down-payment loan guaranteed by USDA for rural homebuyers.
    • VA Mortgage: Loan to qualified veterans, guaranteed by VA.
    • VA Entitlement: Amount VA guarantees to lenders in case of borrower default.
    • Rate Lock Agreement: Commitment from a lender to provide a particular interest rate within a specific time frame.
    • Private Mortgage Insurance (PMI): Protects lenders against borrower default when a borrower has less than 20% down payment or equity. Typically arranged by lenders, paid by borrowers.

    Other Important Terms

    • Safe Harbor: QM status when a mortgage fully meets Ability-to-Repay standards.
    • Third-Party Providers: Settlement service providers not affiliated with the lender.
    • Two-One (2-1) Buy-Down: Temporary payment reductions in the first two years of a mortgage loan, often offered by sellers or builders as sales incentives.
    • Underwriting: Lender's risk assessment process for loan applications.
    • TALC (Total Annual Loan Cost): Estimate of the interest rate for a reverse mortgage, taking into account factors like borrower lifespan and home appreciation.

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    Description

    Test your knowledge on loan interest rates, pricing strategies, and mortgage market concepts. This quiz covers essential terms such as par rate, payment shock, and subprime mortgages. Perfect for students and professionals in finance or real estate.

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