Chapter 14—Types of Financing
MULTIPLE CHOICE
1. The interest rate of a loan from a local savings and loan may be increased or decreased during the life
of the loan. This is an example of
a.
a variable interest rate.
b.
escalated interest.
c.
graduated interest.
d.
percentage interest.
2. All of the following may be used for setting ARM interest rates EXCEPT
a.
one-year U.S. Treasury securities.
b.
six-month Treasury bills.
c.
cost of funds to thrift institutions.
d.
Gross National Product is not used to set ARM interest rates.
3. In order to make adjustable rate mortgage loans more attractive to borrowers, lenders offer
a.
lower initial interest rates.
b.
gifts such as appliances, trips, etc.
c.
lower insurance rates.
d.
lower down payments.
4. What feature in an adjustable rate mortgage protects the borrower against very large monthly payment
increases?
a.
Index rate
b.
Adjustment period
c.
Interest rate cap
d.
Margin
5. The interest rate of an adjustable rate mortgage may rise or fall based on the
a.
interest rate cap.
b.
adjustment period.
c.
index.
d.
margin.
6. In a graduated payment mortgage, the graduated part is the
a.
interest rate.
b.
monthly payment.
c.
maturity date.
d.
entire loan is graduated.
7. Prior to the introduction of adjustable rate mortgages, the FHLBB approved the use of
a.
variable rate mortgages.
b.
renegotiable rate mortgages.
c.
both a and b.
d.
neither a or b.
8. A new home developer who is including appliances with the sale of each house most probably would
assist the buyer in obtaining a
a.
blanket mortgage.
b.
shared appreciation mortgage.
c.
equity sharing mortgage.
d.
package mortgage.
9. When two or more properties serve as collateral for the same loan, it is called a
a.
blanket mortgage.
b.
tandem mortgage.
c.
security mortgage.
d.
blended rate mortgage.
10. A builder bought all 20 lots in a subdivision from the developer, who carried most of the purchase
price on one loan. To sell the lots, he must include a
a.
reverse loan clause.
b.
sale-lease back clause.
c.
package mortgage clause.
d.
partial release clause.
11. When considering a ARM loan, the lender must explain to the borrower, in writing, the
a.
worst-case scenario.
b.
best-case scenario.
c.
average-case scenario.
d.
respective credit report.
12. An elderly couple is “house rich, money poor”. To obtain money now while still living in their
magnificent home, they should look for a
a.
negative amortization.
b.
an adjustable rate mortgage.
c.
a reverse annuity mortgage.
d.
a graduated payment mortgage.
13. Which of the following involves the greatest risk to a lender?
a.
First mortgage
b.
FHA loan
c.
Construction loan
d.
VA loan
14. Construction loans are
a.
long term, low risk.
b.
long term, high risk.
c.
short term, high risk.
d.
short term, low risk.
15. Equity sharing is based on the concept of someone who has assets sharing those assets in exchange for
a.
a share of the ownership.
b.
tax benefits.
c.
both a and b.
d.
neither a nor b.
16. A blended-rate loan arrangement is designed to
a.
raise the rate of interest to the buyer.
b.
lower the sales price of the property.
c.
attract buyers who are discouraged by high interest rates.
d.
pay off a loan sooner.
17. Each of the following statements about open-end mortgage clauses is true EXCEPT
a.
using an open-end clause, the new amount borrowed is added to the mortgage balance.
b.
they are used in government loans like DVA and FHA.
c.
they are used in conventional mortgages.
d.
funds borrowed using an open-end clause are reamortized over the remaining like of the
mortgage.
18. When an existing loan at a low interest rate is refinanced by a new loan at an interest rate between the
current market rate and the rate of the old loan, the result is a
a.
combined rate.
b.
blended loan.
c.
wraparound loan.
d.
merged loan.
19. A loan arrangement whereby a lender extends a line of credit is
a.
a buy-down mortgage.
b.
an open-end mortgage.
c.
a wraparound mortgage.
d.
a purchase money mortgage.
20. The phrase “taking back paper” applies to
a.
a cash sale.
b.
conventional loans.
c.
VA loans.
d.
seller financing.
21. A mortgage taken by a seller from the buyer in part payment of the purchase price of real estate is
known as
a.
seller financing.
b.
a conflict of interest.
c.
usury.
d.
a second trust deed.
22. An individual who is contemplating the purchase of a mortgage as an investment should have
a.
the property appraised.
b.
a credit check made on the borrower.
c.
the title searched.
d.
all of the above.
23. One of the main differences between a land sales contract and a purchase money mortgage is
a.
the passing of title.
b.
interest charged.
c.
time between payments.
d.
the term of the loan.
24. When should a purchase money mortgage properly be recorded?
a.
Before the deed
b.
After the deed
c.
At the same moment as the deed
d.
Upon full payment
25. For a successful wraparound, it is necessary to have an existing mortgage with
a.
a below-market interest rate.
b.
a due-on-sale clause.
c.
an above market interest rate.
d.
an alienation clause.
26. Under the terms of a shared appreciation mortgage
a.
the loan is made at a below-market interest rate.
b.
the lender received a portion of the property’s appreciation.
c.
both a and b.
d.
neither a nor b.
27. A contract for deed on residential property
a.
allows transfer of title to the purchaser at the inception of the mortgage.
b.
transfers title to the purchasers at the fulfillment of the conditions of the mortgage.
c.
does not provide for transfer of title.
d.
requires the owner to occupy the property.
28. A company wishing to raise capital by selling its real estate but still remaining as the occupant of the
property would enter into
a.
a sale and lease-back.
b.
an option agreement.
c.
an equity mortgage.
d.
a contract for deed.
29. An overencumbered property would be one with a market value of
a.
$125,000 with a first mortgage of $75,000 and a second mortgage of $26,000.
b.
$375,000 with a first mortgage of $25,000 and a second mortgage of $200,000.
c.
$120,000 with a first mortgage of $110,000 and a second mortgage of $15,000.
d.
$49,500 with a first mortgage of $20,000 and a second mortgage of $1,000 and a third
mortgage of$2,000.
30. ARM loans with teaser rates are avoided by
a.
mortgage insurers.
b.
secondary market buyers.
c.
both a and b.
d.
neither a nor b.
TRUE/FALSE
1. The first step toward mortgage loans with adjustable interest rates came in the late 1800s.
2. The benefit of an ARM is that ARMs carry an initial interest rate that is lower than the interest rate on
a fixed-rate mortgage of similar maturity.
3. For the borrower there are no disadvantages to an ARM loan.
4. The most popular index is the local bank prime rate.
5. The margin is for the lender’s cost of doing business, risk of loss on the loan, and profit.
6. The index stays constant over the life of the loan but the margin will vary.
7. By far the most common adjustment period in an ARM is six months.
8. By law lenders are required to disclose an interest rate cap.
9. A payment cap leaves open the amount the borrower’s monthly payment can increase in any one year.
10. Regulation Z requires creditors to state the maximum interest rate that an ARM loan may adjust to.
11. The objective of a graduated payment mortgage is to help borrowers pay off their loans more rapidly.
12. Equity sharing provides that in return for providing financing, the lender wants to share in some of the
benefits normally reserved for the equity holder.
13. “Rich uncle “ financing is a variation of equity sharing.
14. A package mortgage involves several properties under the same mortgage.
15. Equity mortgages are typically first lien mortgages that are used to tap the increase in equity resulting
from rising home prices and first loan principal reductions.
16. FIRREA and the Community Reinvestment Act provided strong incentives for private lenders to
engage in affordable housing loans.
17. The Asset Integrated Mortgage is designed to create a savings from the down payment and is
applicable to borrowers who wish to make minimal down payments.
18. Some real estate agents and lenders refer to a loan that is carried back by a seller as a purchase money
mortgage.
19. With a purchase made by an installment contract or land contract title immediately passes to the
purchaser.
20. It is possible for individuals to buy second lien notes.
COMPLETION
1. The interest rate on an ARM is tied to a(n) ____________________ rate.
2. The ____________________ is added to the index rate for the lender’s cost of doing business.
3. When monthly payments are not sufficient to pay the interest due and the difference is added to the
loan balance, this is called ____________________ amortization.
4. With the ____________________ payment mortgage, the interest rate and maturity are fixed but the
monthly payment gradually rises.
5. The type of ARM loan with an enticingly attractive below-market initial rate is called a
____________________ rate adjustable.
6. A loan where items classed as personal property are included with the real estate is called a(n)
____________________ mortgage.
7. A mortgage secured by two or more properties is called a ____________________ mortgage.
8. With a ____________________ mortgage, the lender makes monthly payments to the homeowner.
9. Under a construction loan, also called a(n) ____________________ loan, money is advanced as
construction takes place.
10. A ____________________ mortgage encompasses existing mortgages and is subordinate to them.
MATCHING
Choose the one most appropriate answer for each.
a.
adjustment period
k.
interest rate cap
b.
adjustable rate mortgage (ARM)
l.
negative amortization
c.
blanket mortgage
m.
option
d.
blended-rate loan
n.
overencumbered property
e.
buy-down mortgage
o.
package mortgage
f.
carryback financing
p.
payment cap
g.
contract for deed
q.
reverse mortgage
h.
equity mortgage
r.
sale and leaseback
i.
equity sharing
s.
subordination
j.
graduated payment mortgage
t.
wraparound mortgage
1. the amount of time that elapses between interest rate changes on a loan
2. a mortgage secured by two or more properties
3. a mortgage secured by real and personal property
4. to voluntarily give up a higher mortgage priority for a lower one
5. a situation where the loans against a property exceed the value of the property
6. a financing arrangement whereby an owner-occupant sells the property and then remains as a tenant
7. results when monthly interest exceeds monthly payment an the difference is added to the principal
8. a refinanced loan wherein the lender combines the interest rate of the existing loan with a current rate
9. a mortgage wherein the lender extends a line of credit based on the amount of equity in a person’s
home
10. a payment by the seller to the lender in order to reduce the interest for the buyer
11. a loan wherein the lender makes monthly payments to the property owner who later repays in a lump
sum
12. the ceiling to which the interest rate on a loan can rise
13. a limit on how much a borrower’s payment can increase in any one year
14. a note is accepted by a seller instead of cash
15. an arrangement whereby a party providing financing gets a portion of the ownership
16. a right, for a given period of time, to buy, sell, or lease property at present price and terms
17. a method of selling and financing property whereby the buyer obtains possession but the seller retains
the title
18. a mortgage loan on which the rate of interest can rise and fall with changes in prevailing interest rates
19. a mortgage repayment plan that allows the borrower to make smaller monthly payments at first and
larger ones later
20. a debt instrument that encompasses existing mortgages and in subordinate to them