What is a lien-theory state?

States differ in their interpretation of who owns mortgaged property. Those that regard the mortgage as a lien held by the mortgagee (lender) against the property owned by the mortgagor (borrower) are called lien-theory states. Those that regard the mortgage document as a conveyance of ownership from the mortgagor to the mortgagee are called title-theory states. Lien theory and title theory describe two ways states treat a mortgage. In lien-theory states the borrower keeps legal title and the lender holds only a lien; in title-theory states the mortgage is treated as a conveyance of title to the lender.

A state in which a mortgagee holds legal title to a secured property.

A state that allows a real estate owner's creditors to record liens against the owner's property.

A state in which a lien is considered as a conveyance.

If a borrower obtains an interest-only loan of $200,000 at an annual interest rate of 6%, what is the monthly interest payment?

Multiply the rate times the loan amount and divide by 12 to calculate monthly interest. Thus, ($200,000 x 6%) ÷ 12 = $1,000 Monthly interest on an interest-only loan equals the loan principal times the annual interest rate divided by twelve. The payment covers interest only, so no principal is retired and the balance stays at the original amount.

AMC Bank discovers, in considering buyer Bob's application for a mortgage loan, that Bob has borrowed the down payment from an uncle and has to repay that loan. Bob should expect that AMC Bank will

Since a lender lends only part of the purchase price of a property according to the lender's loan-to-value ratio, a lender will verify that a borrower has the cash resources to make the required down payment. If someone is lending an applicant a portion of the down payment with a provision for repayment, a lender will consider this another debt obligation and adjust the debt ratio accordingly. This can lower the amount a lender is willing to lend. When a borrower owes repayment on money borrowed for the down payment, the lender counts that obligation as another debt. The added debt raises the borrower's debt ratio and can reduce the loan amount the lender will approve.

increase the loan amount to enable the borrower to pay off the loan to the relative.

require the borrower to make payments to an escrow account for repayment of the relative's loan.

A conventional mortgage loan is one that is

A conventional mortgage loan is a permanent long-term loan that is not FHA-insured or VA-guaranteed. FNMA does not "back" loans; FHA only insures FHA loans; and the VA, not GNMA guarantees loans. A conventional loan is any mortgage not insured by the FHA or guaranteed by the VA. Government-backed loans carry federal insurance or guarantees; conventional loans rely on the lender's own underwriting and private mortgage insurance when needed.

backed by the Federal National Mortgage Association.

insured under Section 203(b) of the Federal Housing Administration loan program.

guaranteed by the Government National Mortgage Association.

Which of the following correctly describes the flow of money and documents in a mortgage loan transaction?

When a borrower gives a note promising to repay the borrowed money and executes a mortgage on the real estate for which the money is being borrowed as security, the financing method is called mortgage financing. In mortgage financing the borrower gives the lender two documents: a note promising repayment and a mortgage pledging the property as security. In return the lender advances the loan funds to the borrower.

The lender gives the borrower a mortgage and receives a note in exchange for loan funds.

The borrower receives a note in exchange for a mortgage from the lender.

The lender gives the borrower a note, loan funds and a mortgage.

The difference between a balloon loan and an amortized loan is

Amortized loans retire the principal balance over the loan period. If a loan does not do this, one must make a balloon payment at the end of the loan term to complete the loan payoff. An amortized loan retires principal gradually so the balance reaches zero by the end of the term. A balloon loan leaves a remaining balance that must be paid in one lump sum at the end of the term.

a balloon loan always has a shorter loan term.

an amortized loan requires interest-payments.

a balloon loan must be retired in five years.

The reason lenders consider the loan-to-value ratio important in underwriting is that

Without an ample difference between the property value and the loan amount, a drop in property values could cause the loan balance to exceed the collateral itself. This greatly increases the risk of a loan loss should the borrower default since the balance could not be completely recovered in a foreclosure sale. Loan-to-value compares the loan amount to the property value. Lenders keep the ratio below full value so the collateral is worth more than the debt, protecting against loss if values fall and the borrower defaults.

they don't want to lend borrowers any more money than necessary.

borrowers can only afford to borrow a portion of the entire purchase price.

the higher the loan-to-value ratio, the more profitable the loan.

Which laws or regulations require mortgage lenders to disclose financing costs and annual percentage rate to a borrower before funding a loan?

Regulation Z, which implements the Truth-in-Lending Act, applies to all loans secured by a residence. It does not apply to commercial loans or to agricultural loans over $25,000. It prescribes requirements to lenders regarding the disclosure of costs, the right to rescind the credit transaction, advertising credit offers, and penalties for non-compliance with the Truth-in-Lending Act. The Truth-in-Lending Act, implemented by Regulation Z, requires lenders to disclose financing costs and the annual percentage rate before funding a loan secured by a residence. It also covers rescission rights and credit advertising.

The Equal Credit Opportunity Act.

The Real Estate Settlement and Procedures Act.

How does the secondary mortgage market aid borrowers seeking a mortgage loan?

Secondary mortgage market organizations buy pools of mortgages from primary lenders and sell securities backed by these pooled mortgages to investors. By purchasing loans from primary lenders, the secondary market returns funds to the primary lenders, thereby enabling the primary lender to originate more mortgage loans. The secondary mortgage market buys pools of loans from primary lenders and sells securities backed by them. Returning funds to primary lenders lets those lenders originate more mortgages, which increases the money available to borrowers.

It issues second mortgages and sells them in the home equity market.

It lends funds to banks so they can make more loans.

It pays off defaulted loans made by primary mortgage lenders.

In a graduated payment mortgage loan,

Graduated payment mortgages allow for smaller initial monthly payments which gradually increase. The interest rate remains fixed as does the loan term. A graduated payment mortgage begins with lower monthly payments that rise on a set schedule. The interest rate and loan term stay fixed; only the payment amount changes, matching borrowers whose income is expected to grow.

loan funds are disbursed to the borrower on a graduated basis.

the interest rate periodically increases in graduated phases.

the loan payments gradually increase and the loan term gradually decreases.

Under the Equal Credit Opportunity Act, a lender may not discriminate against a borrower on the basis of:

The Equal Credit Opportunity Act prohibits discrimination based on religion, among other protected classes. The Equal Credit Opportunity Act bars lenders from discriminating in credit decisions based on protected classes such as religion, race, sex, marital status, age, and receipt of public assistance income.

In a scenario where a lender’s loan-to-value (LTV) ratio is 80%, how much can a borrower expect to borrow on a property appraised at $250,000?

With an 80% LTV, the lender would loan up to 80% of the appraised value, or $250,000 x 0.80 = $200,000. The loan-to-value ratio sets the maximum loan as a percentage of appraised value. Multiply the appraised value by the LTV percentage to find the loan amount the lender will advance on the property.

According to RESPA, a lender must provide a Loan Estimate form to the borrower within how many days of receiving a completed loan application?

Under the Real Estate Settlement Procedures Act (RESPA), the lender must provide a Loan Estimate within three business days of receiving a completed application. RESPA requires a lender to deliver the Loan Estimate within three business days after receiving a completed mortgage application. The form itemizes estimated closing costs, loan terms, and other financing charges.

Michael is purchasing a property and is considering a 5-year balloon loan. What will happen at the end of the 5-year term if he still owes a balance?

With a balloon loan, any remaining balance is due as a lump sum at the end of the loan term, requiring the borrower to pay it off or refinance. A balloon loan has scheduled payments that do not fully retire the principal. At the end of the term the remaining balance becomes due in a single lump sum, which the borrower must pay or refinance.

The loan will automatically be extended for another 5 years.

The interest rate will reset, but payments will remain the same.

The loan balance will be forgiven if payments were on time.

Mark applies for a loan with a 10-year term that has a balloon payment due at the end. What happens to his loan balance at the end of the term if he hasn’t paid it off?

In a balloon loan, any remaining balance is due as a single lump sum at the end of the term unless refinanced. A balloon loan does not fully amortize, so a balance remains at the end of the term. That remaining balance is due as one lump-sum payment unless the borrower refinances or pays it off beforehand.

The lender automatically forgives the remaining balance.

The interest rate resets and the term extends another 10 years.

Payments continue until the balance reaches zero.

Under Regulation Z, which of the following actions is required when advertising a loan’s interest rate?

Regulation Z requires that any advertisement displaying an interest rate must also include the annual percentage rate (APR) to ensure full disclosure of loan costs. Under Regulation Z, an advertisement that states an interest rate must also disclose the annual percentage rate. The APR reflects the total cost of credit and lets borrowers compare loan offers accurately.

Displaying only the interest rate without additional details

Highlighting the lender’s profit margin

Providing the borrower’s credit score requirement

What type of loan requires a borrower to make small initial payments that gradually increase over time, typically to accommodate anticipated increases in income?

A graduated payment mortgage allows for lower initial payments that increase over time, helping borrowers whose income is expected to rise. A graduated payment mortgage charges smaller payments early that increase on a schedule over the loan term. It suits borrowers who expect their income to rise, since early payments are easier to afford.

What is the primary purpose of private mortgage insurance (PMI) on a conventional loan?

Private mortgage insurance (PMI) protects the lender by covering a portion of the loan if the borrower defaults, especially when the down payment is below 20%. Private mortgage insurance protects the lender, not the borrower, by reimbursing part of the loss if the borrower defaults. Lenders usually require it when the down payment is below twenty percent.

To protect the borrower from job loss

To lower the interest rate on the loan

To reduce the borrower’s down payment requirement to zero

A graduated payment mortgage would be most beneficial to which type of borrower?

A graduated payment mortgage starts with lower initial payments that increase over time, which benefits borrowers expecting future income growth. Graduated payment mortgages start with low payments that grow over time. They benefit borrowers who expect significant future income growth and can handle larger payments later in the loan.

A borrower who needs predictable, stable payments

A borrower planning to make only interest payments

A borrower who wants to avoid adjustable rates

In a shared appreciation mortgage (SAM), what does the borrower agree to in exchange for a lower interest rate?

In a shared appreciation mortgage, the borrower agrees to give the lender a share of the property’s appreciation value upon sale, often in exchange for a lower interest rate. In a shared appreciation mortgage the lender accepts a lower interest rate in return for a share of the property's increased value when it is sold. The borrower trades future appreciation for cheaper current financing.

Paying a higher initial interest rate than a standard mortgage

Agreeing to prepay a portion of the loan principal

Forgoing the right to sell the property without lender consent

ApexAgent Practice Questions

Real Estate Financing and Mortgages

Financing is one of the heaviest sections on the national exam, and most of it comes down to the terms of the loan: rate, term, amortization, and who carries the risk. The 20 questions below cover mortgage instruments, loan types, government programs and financing math. Each answer carries the rule and the reasoning.

20 practice questions with answers and explanations. Written and reviewed by the ApexAgent team against the national exam content outline, updated 2026-10-04.

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What this topic tests

Lien-theory states treat the mortgage as a lien; title-theory states treat it as a conveyance.
The borrower gives the lender a note and a mortgage in exchange for loan funds.
Lenders use loan-to-value ratios to keep collateral value above the loan balance.
Regulation Z requires disclosure of financing costs and the annual percentage rate.
Balloon loans leave a lump-sum balance due at the end of the loan term.
Graduated payment mortgages start low and rise, suiting borrowers with growing income.

Jump to a question

1. What is a lien-theory state?
2. If a borrower obtains an interest-only loan of $200,000
3. AMC Bank discovers, in considering buyer Bob's application for
4. A conventional mortgage loan is one that is
5. Which of the following correctly describes the flow of
6. The difference between a balloon loan and an amortized
7. The reason lenders consider the loan-to-value ratio important in
8. Which laws or regulations require mortgage lenders to disclose
9. How does the secondary mortgage market aid borrowers seeking
10. In a graduated payment mortgage loan,
11. Under the Equal Credit Opportunity Act, a lender may
12. In a scenario where a lender’s loan-to-value (LTV) ratio
13. According to RESPA, a lender must provide a Loan
14. Michael is purchasing a property and is considering a
15. Mark applies for a loan with a 10-year term
16. Under Regulation Z, which of the following actions is
17. What type of loan requires a borrower to make
18. What is the primary purpose of private mortgage insurance
19. A graduated payment mortgage would be most beneficial to
20. In a shared appreciation mortgage (SAM), what does the

20 real estate exam questions on this topic

Question 1 of 20
What is a lien-theory state?
- A state in which a mortgagee holds legal title to a secured property.
- A state in which a mortgagee has equitable title to a secured property.Correct answer
- A state that allows a real estate owner's creditors to record liens against the owner's property.
- A state in which a lien is considered as a conveyance.
Correct answer: B. A state in which a mortgagee has equitable title to a secured property.
Why: States differ in their interpretation of who owns mortgaged property. Those that regard the mortgage as a lien held by the mortgagee (lender) against the property owned by the mortgagor (borrower) are called lien-theory states. Those that regard the mortgage document as a conveyance of ownership from the mortgagor to the mortgagee are called title-theory states.
The rule: Lien theory and title theory describe two ways states treat a mortgage. In lien-theory states the borrower keeps legal title and the lender holds only a lien; in title-theory states the mortgage is treated as a conveyance of title to the lender.
Why the other options are wrong
- In lien-theory states the borrower keeps legal title; a mortgagee holding legal title describes title theory.
- This describes general creditor liens, not how a state interprets a mortgage document.
- Calling the lien a conveyance is the title-theory view; lien theory rejects that treatment.
Question 2 of 20
If a borrower obtains an interest-only loan of $200,000 at an annual interest rate of 6%, what is the monthly interest payment?
- $1,200.00
- $600.00
- $500.00
- $1,000.00Correct answer
Correct answer: D. $1,000.00
Why: Multiply the rate times the loan amount and divide by 12 to calculate monthly interest. Thus, ($200,000 x 6%) ÷ 12 = $1,000
The rule: Monthly interest on an interest-only loan equals the loan principal times the annual interest rate divided by twelve. The payment covers interest only, so no principal is retired and the balance stays at the original amount.
Why the other options are wrong
- Applying the annual rate incorrectly overstates monthly interest; the rule divides annual interest by twelve.
- Using the wrong rate or misplacing the decimal understates interest; it equals principal times rate divided by twelve.
- Halving the six percent rate before dividing ignores the stated note rate on this loan.
Question 3 of 20
AMC Bank discovers, in considering buyer Bob's application for a mortgage loan, that Bob has borrowed the down payment from an uncle and has to repay that loan. Bob should expect that AMC Bank will
- refuse the application.
- adjust the applicant's debt ratio calculation and lower the loan amount.Correct answer
- increase the loan amount to enable the borrower to pay off the loan to the relative.
- require the borrower to make payments to an escrow account for repayment of the relative's loan.
Correct answer: B. adjust the applicant's debt ratio calculation and lower the loan amount.
Why: Since a lender lends only part of the purchase price of a property according to the lender's loan-to-value ratio, a lender will verify that a borrower has the cash resources to make the required down payment. If someone is lending an applicant a portion of the down payment with a provision for repayment, a lender will consider this another debt obligation and adjust the debt ratio accordingly. This can lower the amount a lender is willing to lend.
The rule: When a borrower owes repayment on money borrowed for the down payment, the lender counts that obligation as another debt. The added debt raises the borrower's debt ratio and can reduce the loan amount the lender will approve.
Why the other options are wrong
- Lenders rarely refuse outright; a repayable down payment loan is treated as added debt and reworked.
- Increasing the loan amount is backwards, since the repayment obligation reduces borrowing capacity rather than raising it.
- Escrow accounts collect taxes and insurance, not private family loans used for a down payment.
Question 4 of 20
A conventional mortgage loan is one that is
- backed by the Federal National Mortgage Association.
- insured under Section 203(b) of the Federal Housing Administration loan program.
- guaranteed by the Government National Mortgage Association.
- not FHA-insured or VA-guaranteed.Correct answer
Correct answer: D. not FHA-insured or VA-guaranteed.
Why: A conventional mortgage loan is a permanent long-term loan that is not FHA-insured or VA-guaranteed. FNMA does not "back" loans; FHA only insures FHA loans; and the VA, not GNMA guarantees loans.
The rule: A conventional loan is any mortgage not insured by the FHA or guaranteed by the VA. Government-backed loans carry federal insurance or guarantees; conventional loans rely on the lender's own underwriting and private mortgage insurance when needed.
Why the other options are wrong
- FNMA does not back loans; it buys mortgages on the secondary market.
- FHA insurance makes a loan government-insured, which is the opposite of conventional.
- GNMA guarantees securities, and the VA guarantees VA loans, not conventional mortgages.
Question 5 of 20
Which of the following correctly describes the flow of money and documents in a mortgage loan transaction?
- The borrower gives the lender a note and a mortgage in exchange for loan funds.Correct answer
- The lender gives the borrower a mortgage and receives a note in exchange for loan funds.
- The borrower receives a note in exchange for a mortgage from the lender.
- The lender gives the borrower a note, loan funds and a mortgage.
Correct answer: A. The borrower gives the lender a note and a mortgage in exchange for loan funds.
Why: When a borrower gives a note promising to repay the borrowed money and executes a mortgage on the real estate for which the money is being borrowed as security, the financing method is called mortgage financing.
The rule: In mortgage financing the borrower gives the lender two documents: a note promising repayment and a mortgage pledging the property as security. In return the lender advances the loan funds to the borrower.
Why the other options are wrong
- This reverses the roles; the borrower gives the mortgage to the lender, not the other way around.
- The borrower gives the note to the lender, not receives it, in mortgage financing.
- The borrower gives the documents and the lender advances the funds, not the reverse.
Question 6 of 20
The difference between a balloon loan and an amortized loan is
- an amortized loan is paid off over the loan period.Correct answer
- a balloon loan always has a shorter loan term.
- an amortized loan requires interest-payments.
- a balloon loan must be retired in five years.
Correct answer: A. an amortized loan is paid off over the loan period.
Why: Amortized loans retire the principal balance over the loan period. If a loan does not do this, one must make a balloon payment at the end of the loan term to complete the loan payoff.
The rule: An amortized loan retires principal gradually so the balance reaches zero by the end of the term. A balloon loan leaves a remaining balance that must be paid in one lump sum at the end of the term.
Why the other options are wrong
- A balloon loan can carry any term length, so a shorter term is not the defining difference.
- Both amortized and balloon loans require interest payments, so this does not distinguish them.
- No rule forces a balloon loan to be retired within five years.
Question 7 of 20
The reason lenders consider the loan-to-value ratio important in underwriting is that
- they don't want to lend borrowers any more money than necessary.
- they want to ensure there is more than enough collateral to cover the loan amount.Correct answer
- borrowers can only afford to borrow a portion of the entire purchase price.
- the higher the loan-to-value ratio, the more profitable the loan.
Correct answer: B. they want to ensure there is more than enough collateral to cover the loan amount.
Why: Without an ample difference between the property value and the loan amount, a drop in property values could cause the loan balance to exceed the collateral itself. This greatly increases the risk of a loan loss should the borrower default since the balance could not be completely recovered in a foreclosure sale.
The rule: Loan-to-value compares the loan amount to the property value. Lenders keep the ratio below full value so the collateral is worth more than the debt, protecting against loss if values fall and the borrower defaults.
Why the other options are wrong
- Loan-to-value protects collateral value, not a lender's desire to lend as little as possible.
- Affordability relates to income and debt ratios, while LTV concerns collateral against the loan.
- A higher loan-to-value ratio means greater risk and less protection, not more profit.
Question 8 of 20
Which laws or regulations require mortgage lenders to disclose financing costs and annual percentage rate to a borrower before funding a loan?
- The Equal Credit Opportunity Act.
- Truth-in-Lending laws and Regulation Z.Correct answer
- The Real Estate Settlement and Procedures Act.
- Federal Fair Housing Laws.
Correct answer: B. Truth-in-Lending laws and Regulation Z.
Why: Regulation Z, which implements the Truth-in-Lending Act, applies to all loans secured by a residence. It does not apply to commercial loans or to agricultural loans over $25,000. It prescribes requirements to lenders regarding the disclosure of costs, the right to rescind the credit transaction, advertising credit offers, and penalties for non-compliance with the Truth-in-Lending Act.
The rule: The Truth-in-Lending Act, implemented by Regulation Z, requires lenders to disclose financing costs and the annual percentage rate before funding a loan secured by a residence. It also covers rescission rights and credit advertising.
Why the other options are wrong
- The Equal Credit Opportunity Act bans credit discrimination, not the disclosure of loan costs.
- RESPA covers settlement cost disclosures, while the APR disclosure is required by Truth-in-Lending.
- Fair housing laws address discrimination in housing, not financing cost disclosure.
Question 9 of 20
How does the secondary mortgage market aid borrowers seeking a mortgage loan?
- It cycles funds back to primary lenders so they can make more loans.Correct answer
- It issues second mortgages and sells them in the home equity market.
- It lends funds to banks so they can make more loans.
- It pays off defaulted loans made by primary mortgage lenders.
Correct answer: A. It cycles funds back to primary lenders so they can make more loans.
Why: Secondary mortgage market organizations buy pools of mortgages from primary lenders and sell securities backed by these pooled mortgages to investors. By purchasing loans from primary lenders, the secondary market returns funds to the primary lenders, thereby enabling the primary lender to originate more mortgage loans.
The rule: The secondary mortgage market buys pools of loans from primary lenders and sells securities backed by them. Returning funds to primary lenders lets those lenders originate more mortgages, which increases the money available to borrowers.
Why the other options are wrong
- The secondary market buys existing mortgages; it does not originate second mortgages or sell home equity loans.
- It buys loans from lenders rather than lending funds to banks directly.
- It does not pay off defaulted loans; it pools and sells mortgages to investors.
Question 10 of 20
In a graduated payment mortgage loan,
- loan funds are disbursed to the borrower on a graduated basis.
- the interest rate periodically increases in graduated phases.
- the loan payments gradually increase.Correct answer
- the loan payments gradually increase and the loan term gradually decreases.
Correct answer: C. the loan payments gradually increase.
Why: Graduated payment mortgages allow for smaller initial monthly payments which gradually increase. The interest rate remains fixed as does the loan term.
The rule: A graduated payment mortgage begins with lower monthly payments that rise on a set schedule. The interest rate and loan term stay fixed; only the payment amount changes, matching borrowers whose income is expected to grow.
Why the other options are wrong
- Disbursement timing is unrelated to a graduated payment loan, which changes payment amounts, not funding.
- A periodically rising rate describes an adjustable-rate mortgage, not a graduated payment mortgage.
- Graduated payment loans keep the term fixed; only the payment amount rises over time.
Question 11 of 20
Under the Equal Credit Opportunity Act, a lender may not discriminate against a borrower on the basis of:
- credit history.
- source of income.
- religion.Correct answer
- current employer.
Correct answer: C. religion.
Why: The Equal Credit Opportunity Act prohibits discrimination based on religion, among other protected classes.
The rule: The Equal Credit Opportunity Act bars lenders from discriminating in credit decisions based on protected classes such as religion, race, sex, marital status, age, and receipt of public assistance income.
Why the other options are wrong
- Credit history is a legitimate underwriting factor, not a protected class under the act.
- Income source may be reviewed for underwriting; religion is the protected class listed here.
- Current employer is a valid credit factor; lenders may not discriminate based on religion.
Question 12 of 20
In a scenario where a lender’s loan-to-value (LTV) ratio is 80%, how much can a borrower expect to borrow on a property appraised at $250,000?
- $200,000Correct answer
- $225,000
- $150,000
- $175,000
Correct answer: A. $200,000
Why: With an 80% LTV, the lender would loan up to 80% of the appraised value, or $250,000 x 0.80 = $200,000.
The rule: The loan-to-value ratio sets the maximum loan as a percentage of appraised value. Multiply the appraised value by the LTV percentage to find the loan amount the lender will advance on the property.
Why the other options are wrong
- 225,000 equals ninety percent of value, not the eighty percent the lender will advance.
- 150,000 equals sixty percent of value, far below the stated loan-to-value ratio.
- 175,000 equals seventy percent of value, not the eighty percent loan-to-value ratio.
Question 13 of 20
According to RESPA, a lender must provide a Loan Estimate form to the borrower within how many days of receiving a completed loan application?
- Two business days
- Three business daysCorrect answer
- Seven calendar days
- Five business days
Correct answer: B. Three business days
Why: Under the Real Estate Settlement Procedures Act (RESPA), the lender must provide a Loan Estimate within three business days of receiving a completed application.
The rule: RESPA requires a lender to deliver the Loan Estimate within three business days after receiving a completed mortgage application. The form itemizes estimated closing costs, loan terms, and other financing charges.
Why the other options are wrong
- Two business days is too short; RESPA allows three business days for the Loan Estimate.
- Seven calendar days confuses the rule, which counts business days, not calendar days.
- Five business days overstates the period; the Loan Estimate is due within three business days.
Question 14 of 20
Michael is purchasing a property and is considering a 5-year balloon loan. What will happen at the end of the 5-year term if he still owes a balance?
- The remaining balance will be due in full as a lump sum payment.Correct answer
- The loan will automatically be extended for another 5 years.
- The interest rate will reset, but payments will remain the same.
- The loan balance will be forgiven if payments were on time.
Correct answer: A. The remaining balance will be due in full as a lump sum payment.
Why: With a balloon loan, any remaining balance is due as a lump sum at the end of the loan term, requiring the borrower to pay it off or refinance.
The rule: A balloon loan has scheduled payments that do not fully retire the principal. At the end of the term the remaining balance becomes due in a single lump sum, which the borrower must pay or refinance.
Why the other options are wrong
- Nothing extends the loan automatically; the remaining balance is simply due at term end.
- A rate reset describes an adjustable-rate mortgage, not the balloon payment due at term.
- Lenders do not forgive a balloon balance just because payments were timely.
Question 15 of 20
Mark applies for a loan with a 10-year term that has a balloon payment due at the end. What happens to his loan balance at the end of the term if he hasn’t paid it off?
- It becomes due in a single lump sum payment.Correct answer
- The lender automatically forgives the remaining balance.
- The interest rate resets and the term extends another 10 years.
- Payments continue until the balance reaches zero.
Correct answer: A. It becomes due in a single lump sum payment.
Why: In a balloon loan, any remaining balance is due as a single lump sum at the end of the term unless refinanced.
The rule: A balloon loan does not fully amortize, so a balance remains at the end of the term. That remaining balance is due as one lump-sum payment unless the borrower refinances or pays it off beforehand.
Why the other options are wrong
- Lenders do not forgive the remaining balance; it stays payable in full at the end of the term.
- A rate reset and term extension describe an adjustable-rate mortgage, not a balloon loan.
- Payments do not simply continue; the full remaining balance becomes due at once.
Question 16 of 20
Under Regulation Z, which of the following actions is required when advertising a loan’s interest rate?
- Including the annual percentage rate (APR) if the interest rate is shownCorrect answer
- Displaying only the interest rate without additional details
- Highlighting the lender’s profit margin
- Providing the borrower’s credit score requirement
Correct answer: A. Including the annual percentage rate (APR) if the interest rate is shown
Why: Regulation Z requires that any advertisement displaying an interest rate must also include the annual percentage rate (APR) to ensure full disclosure of loan costs.
The rule: Under Regulation Z, an advertisement that states an interest rate must also disclose the annual percentage rate. The APR reflects the total cost of credit and lets borrowers compare loan offers accurately.
Why the other options are wrong
- Advertising the rate without the APR violates Regulation Z's trigger-term disclosure rule.
- A lender's profit margin is not a required disclosure in mortgage advertising.
- Credit score requirements are not the disclosure Reg Z ties to advertising an interest rate.
Question 17 of 20
What type of loan requires a borrower to make small initial payments that gradually increase over time, typically to accommodate anticipated increases in income?
- Adjustable-rate mortgage (ARM)
- Reverse mortgage
- Graduated payment mortgageCorrect answer
- Interest-only mortgage
Correct answer: C. Graduated payment mortgage
Why: A graduated payment mortgage allows for lower initial payments that increase over time, helping borrowers whose income is expected to rise.
The rule: A graduated payment mortgage charges smaller payments early that increase on a schedule over the loan term. It suits borrowers who expect their income to rise, since early payments are easier to afford.
Why the other options are wrong
- An adjustable-rate mortgage changes with market rates, not on a schedule tied to rising income.
- A reverse mortgage pays the borrower and does not feature gradually increasing payments.
- An interest-only loan keeps payments flat and never retires principal.
Question 18 of 20
What is the primary purpose of private mortgage insurance (PMI) on a conventional loan?
- To protect the borrower from job loss
- To reimburse the lender if the borrower defaultsCorrect answer
- To lower the interest rate on the loan
- To reduce the borrower’s down payment requirement to zero
Correct answer: B. To reimburse the lender if the borrower defaults
Why: Private mortgage insurance (PMI) protects the lender by covering a portion of the loan if the borrower defaults, especially when the down payment is below 20%.
The rule: Private mortgage insurance protects the lender, not the borrower, by reimbursing part of the loss if the borrower defaults. Lenders usually require it when the down payment is below twenty percent.
Why the other options are wrong
- PMI protects the lender against default; it does not cover the borrower's job loss.
- PMI is an insurance cost and does not lower the interest rate on the loan.
- PMI does not eliminate the down payment; it is required precisely because the down payment is low.
Question 19 of 20
A graduated payment mortgage would be most beneficial to which type of borrower?
- A borrower expecting significant future income growthCorrect answer
- A borrower who needs predictable, stable payments
- A borrower planning to make only interest payments
- A borrower who wants to avoid adjustable rates
Correct answer: A. A borrower expecting significant future income growth
Why: A graduated payment mortgage starts with lower initial payments that increase over time, which benefits borrowers expecting future income growth.
The rule: Graduated payment mortgages start with low payments that grow over time. They benefit borrowers who expect significant future income growth and can handle larger payments later in the loan.
Why the other options are wrong
- Stable, predictable payments describe a fixed-rate loan, while graduated payments rise over time.
- Interest-only payments describe a different product and do not match the graduated payment feature.
- Avoiding adjustable rates is a fixed-rate preference, not the reason a graduated schedule helps.
Question 20 of 20
In a shared appreciation mortgage (SAM), what does the borrower agree to in exchange for a lower interest rate?
- Allowing the lender to take a percentage of the property’s appreciation upon saleCorrect answer
- Paying a higher initial interest rate than a standard mortgage
- Agreeing to prepay a portion of the loan principal
- Forgoing the right to sell the property without lender consent
Correct answer: A. Allowing the lender to take a percentage of the property’s appreciation upon sale
Why: In a shared appreciation mortgage, the borrower agrees to give the lender a share of the property’s appreciation value upon sale, often in exchange for a lower interest rate.
The rule: In a shared appreciation mortgage the lender accepts a lower interest rate in return for a share of the property's increased value when it is sold. The borrower trades future appreciation for cheaper current financing.
Why the other options are wrong
- A shared appreciation mortgage offers a lower rate, not a higher initial rate than a standard loan.
- Prepaying principal is unrelated; the borrower instead shares future appreciation with the lender.
- The borrower is not barred from selling; the lender simply receives a share of appreciation at sale.

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Finance: frequently asked

What is the difference between lien theory and title theory states?

In lien-theory states the borrower keeps legal title and the lender holds only a lien against the property. In title-theory states the mortgage is treated as a conveyance, giving the lender title until the debt is repaid. Most states follow lien theory today.

How do you calculate monthly interest on an interest-only loan?

Multiply the loan principal by the annual interest rate, then divide by twelve to get the monthly interest. For a $200,000 loan at six percent, that is $200,000 times 0.06, divided by twelve, which equals $1,000 per month.

What does private mortgage insurance protect on a conventional loan?

Private mortgage insurance protects the lender, not the borrower. It covers part of the lender's loss if the borrower defaults, and lenders typically require it when the down payment is below twenty percent of the purchase price.

Concepts behind these questions

Each definition includes the mnemonic, the trap the exam sets and a few practice questions of its own.

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