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1 Printable Lesson Materials Print these materials as a study guide These printable materials allow you to study away from your computer, which many students find beneficial. These materials consist of two parts: graphic summaries of the content and a multiple choice quiz. Graphic Summaries This portion of your printable materials consists of dozens of frames that summarize the content in this lesson. The frames are arranged on the page to make it easy for you to study the material and add your own notes from your textbook or the online course. Quizzes Many students learn best from sets of questions, and this multiple choice quiz allows you to focus your review of the material to important topics Rockwell Institute NE 20th Street Bellevue, WA

2 Financing Residential Real Estate Lesson 10: Conventional Financing Introduction In this lesson we will cover: conforming and nonconforming loans, characteristics of conventional loans, qualifying standards for conventional loans, and special programs and payment plans. Introduction Loans made by mortgage lenders can be divided into two main categories: conventional loans government-sponsored loans

3 Introduction Conventional loan Any institutional loan that isn t insured or guaranteed by a government agency. Conforming & Nonconforming Loans Most conventional loans comply with underwriting guidelines set by Fannie Mae and Freddie Mac. Conforming loan: complies with those guidelines. Nonconforming loan: doesn t comply. Conventional Loan Characteristics Fannie Mae/Freddie Mac underwriting guidelines are widely followed in the mortgage industry because lenders want to be able to sell their loans on secondary market. Many of the rules covered here are based on their guidelines.

4 Conventional Loan Characteristics Topics: Property types and owner-occupancy Loan amounts Repayment periods Amortization Loan-to-value ratios Risk-based loan fees Private mortgage insurance Secondary financing Conventional Loan Characteristics Property types and owner-occupancy Fannie Mae and Freddie Mac buy loans secured by residential property: detached site-built houses townhouses condominium units cooperative units manufactured homes Conventional Loan Characteristics Property types and owner-occupancy Fannie Mae and Freddie Mac don t require owneroccupancy, but different (generally stricter) underwriting rules apply to investor loans. Investor loan: Borrower purchasing property doesn t intend to occupy it.

5 Conventional Loan Characteristics Property types and owner-occupancy Conventional loan may be secured by: Principal residence Up to 4 dwelling units Second home No more than 1 dwelling unit Investment property Up to 4 dwelling units Conventional Loan Characteristics Loan amounts Conforming loan limits are set annually by Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac. If loan amount exceeds applicable limit, the agencies won t purchase the loan. Different loan limits for different areas, based on area median home prices. Different limits for one-, two-, three-, and four-unit dwellings. Conventional Loan Characteristics Loan amounts 2009 conforming loan limits for one-unit dwellings In most areas: $417,000 In high-cost areas: 125% of area median house price, up to a maximum of $729,750. Higher limits for Alaska, Hawaii, Guam, and Virgin Islands.

6 Conventional Loan Characteristics Loan amounts Loan that exceeds conforming loan limit is called a jumbo loan. Typically, jumbo loans: have higher interest rates and loan fees than conforming loans, and are underwritten using stricter standards. For example, lower maximum LTV, higher credit score requirements. Conventional Loan Characteristics Repayment periods Repayment periods can range from 10 to 40 years. 30-year loans are standard. 15-year loans also popular. Conventional Loan Characteristics Amortization Standard conventional loan is fully amortized. Partially amortized and interest-only loans also available.

7 Conventional Loan Characteristics Loan-to-value ratios Traditional standard conventional LTV: 80% Loans with LTVs up to 95% also available. During subprime boom, higher LTVs were available: 97% or even 100%. Now uncommon. Also, loans with LTVs of 90% or 95% are less easily obtained than they were a few years ago. Conventional Loan Characteristics Loan-to-value ratios Conventional loans may be categorized by LTV ratio, with different underwriting rules applied to each category. Fannie Mae and Freddie Mac require any conventional loan with LTV over 80% to have private mortgage insurance. Conventional Loan Characteristics Loan-to-value ratios High-LTV loans also usually have: higher interest rates and fees, and stricter underwriting rules.

8 Conventional Loan Characteristics Combined loan-to-value ratios If there are other mortgages against a property, lender will be concerned with the combined loan-to-value ratio (CLTV). CLTV generally should not exceed usual LTV limit, but in some cases a higher CLTV is allowed. Conventional Loan Characteristics Risk-based loan fees Fannie Mae and Freddie Mac require most borrowers to pay risk-based loan fees called loan-level price adjustments (LLPAs). Conventional Loan Characteristics Risk-based loan fees Loan-level price adjustments shift some of the risk (cost) of mortgage defaults onto borrowers. Generally, the riskier the loan, the more the borrower will have to pay in LLPAs.

9 Conventional Loan Characteristics Risk-based loan fees Nearly all loans sold to Fannie Mae and Freddie Mac are subject to an LLPA that varies based on borrower s credit score and loan-to-value ratio. Example: Borrower with 650 credit score and 80% LTV might be charged LLPA of 2.75% of loan amount. But borrower with 710 credit score and 90% LTV might be charged only 0.5%. Conventional Loan Characteristics Risk-based loan fees One or more additional LLPAs may be charged because loan is ARM, investor loan, interest-only loan, or some other relatively risky type of loan. Fannie Mae and Freddie Mac also levy a flat fee called an adverse market delivery charge on every borrower to help agencies recover losses caused by poor market conditions. Conventional Loan Characteristics Private mortgage insurance Private mortgage insurance (PMI) helps protect lenders from risk of high-ltv loans. Required for convention loans if LTV over 80%. Makes up for reduced borrower equity.

10 Private Mortgage Insurance How PMI works Private mortgage insurance company assumes only a portion of risk of default and foreclosure loss. PMI covers upper portion of loan. Typically 25% to 30% of loan amount. Private Mortgage Insurance How PMI works Upon default and foreclosure, lender makes claim for reimbursement of actual losses. Or may relinquish property to insurer. Private Mortgage Insurance How PMI works Insurers have own underwriting standards, which have been influential in mortgage industry.

11 Private Mortgage Insurance PMI premiums Mortgage insurance company charges risk-based premiums for coverage. Variety of payment plans, including: flat monthly premium; initial premium at closing, plus renewal premiums; or financed one-time premium. Private Mortgage Insurance PMI premiums With some plans, borrower who pays off loan early is entitled to partial refund of initial premium or financed one-time premium. But plans that don t provide for refunds are less expensive. Private Mortgage Insurance Deductibility of PMI premiums PMI premiums are currently tax-deductible. No deduction if family income is over $109,000. Deductibility set to expire in 2010.

12 Private Mortgage Insurance Cancellation of PMI Under federal Homeowners Protection Act, lenders must cancel loan s PMI under certain conditions: 1. once loan has been paid down to 80% of property s original value (upon borrower request); or 2. once loan reaches 78% of property s original value (automatic cancellation). Private Mortgage Insurance Cancellation of PMI Homeowners Protection Act applies only to loans on single-family dwellings occupied as borrower s primary residence. Depending on payment plan, cancellation of PMI may reduce monthly mortgage payment. Secondary Financing Lenders generally allow secondary financing in conjunction with a conventional loan. Most impose some restrictions to minimize increased risk that borrower will default on primary loan.

13 Secondary Financing Restrictions Examples of restrictions lenders may impose: 1. Borrower must qualify for payments on both first and second mortgages. Secondary Financing Restrictions Examples of restrictions lenders may impose: 1. Borrower must qualify for payments on both first and second mortgages. 2. Borrower must make 5% downpayment. Secondary Financing Restrictions Examples of restrictions lenders may impose: 1. Borrower must qualify for payments on both first and second mortgages. 2. Borrower must make 5% downpayment. 3. Scheduled payments must be due on regular basis.

14 Secondary Financing Restrictions 4. Second mortgage can t require balloon payment less than 5 years after closing. Secondary Financing Restrictions 4. Second mortgage can t require balloon payment less than 5 years after closing. 5. If first mortgage has variable payments, second mortgage must have fixed payments. Secondary Financing Restrictions 4. Second mortgage can t require balloon payment less than 5 years after closing. 5. If first mortgage has variable payments, second mortgage must have fixed payments. 6. No negative amortization.

15 Secondary Financing Restrictions 4. Second mortgage can t require balloon payment less than 5 years after closing. 5. If first mortgage has variable payments, second mortgage must have fixed payments. 6. No negative amortization. 7. No prepayment penalty. Secondary Financing Piggyback loans Secondary financing is sometimes referred to as a piggyback loan, especially when it is used to either: avoid paying private mortgage insurance, or avoid jumbo loan treatment. Secondary Financing Piggyback loans With piggyback loan, LTV of primary loan isn t over 80%. So PMI requirement doesn t apply. With piggyback loan, loan amount for primary loan doesn t exceed conforming loan limit. So higher costs and stricter rules for jumbo loans don t apply.

16 Secondary Financing Piggyback loans Piggybacking was popular during subprime boom, but is no longer widely used. Advantages of piggybacking reduced by: tax deductibility of PMI premiums loan-level price adjustments imposed on secondary financing Summary Conventional Loan Characteristics Conventional loan Conforming loan Nonconforming loan Conforming loan limits Jumbo loan Loan-level price adjustment (LLPA) Adverse market delivery charge PMI Piggyback loan Conventional Qualifying Standards Evaluating risk factors Fannie Mae and Freddie Mac have changed how they evaluate creditworthiness of applicants. Newer methods influenced by automated underwriting systems and computer analysis.

17 Conventional Qualifying Standards Evaluating risk factors Fannie Mae uses comprehensive risk assessment to evaluate risk factors. Two primary risk factors: applicant s credit reputation, and the loan-to-value ratio. Conventional Qualifying Standards Evaluating risk factors Fannie Mae uses comprehensive risk assessment to evaluate risk factors. Two primary risk factors: applicant s credit reputation, and the loan-to-value ratio. Loans ranked as low, moderate, or high primary risk. Conventional Qualifying Standards Evaluating risk factors Fannie Mae treats other aspects of application, such as debt to income ratio and cash reserves, as contributory risk factors. Each factor assigned value depending on whether it: satisfies basic risk tolerances, increases risk, or decreases risk.

18 Conventional Qualifying Standards Evaluating risk factors Freddie Mac s underwriting guidelines call for separate evaluation of each component of creditworthiness: credit reputation, income, net worth. Underwriter then considers overall layering of risk. Weakness in one component can be outweighed by strength in another. Conventional Qualifying Standards Evaluating risk factors Difference between Fannie Mae s approach and Freddie Mac s approach is mainly a difference in terminology. Both agencies consider the borrower s overall financial picture, with positive factors offsetting negative ones and vice versa. Conventional Qualifying Standards Credit reputation Credit scores have become a central factor in conventional underwriting. Excellent score can offset weaknesses in other aspects of application. Poor score may doom application. For instance, Fannie Mae won t buy a loan if borrower s score is under 580.

19 Conventional Qualifying Standards Credit reputation Credit scores from the three main credit bureaus usually vary somewhat for a given borrower. Under Fannie Mae and Freddie Mac rules, credit score used for underwriting (representative credit score) is: lower of two scores, or middle of three scores. Conventional Qualifying Standards Credit reputation When two people apply for a loan together, lowest representative credit score (not an average) is used for underwriting. Conventional Qualifying Standards Income analysis Fannie Mae and Freddie Mac consider income durable if it is expected to continue for at least 3 years after loan is made.

20 Income Analysis Income ratios For a conventional loan, applicant s stable monthly income is generally considered adequate if they don t exceed these benchmarks: Total debt to income ratio: 36% Housing expense to income ratio: 28% Income Analysis Income ratios Housing expense ratio is less important than total debt to income ratio. Fannie Mae no longer applies a housing expense to income ratio. Income Analysis Compensating factors Fannie Mae and Freddie Mac allow income ratios to exceed benchmarks if there are compensating factors.

21 Income Analysis Compensating factors Possible compensating factors include: large downpayment substantial net worth demonstrated ability to incur few debts and accumulate savings education, job training, or employment history indicating potential for increased earnings Income Analysis Compensating factors (Possible compensating factors, cont.) short-term income that doesn t count as stable monthly income demonstrated ability to devote large portion of income to basic needs, such as housing expense significant energy-efficient features in home being purchased Income Analysis Compensating factors Even if there are compensating factors, income ratios shouldn t exceed benchmarks by too much. For manually underwritten loan, Fannie Mae and Freddie Mac won t accept total debt to income ratio over 45%. No set maximum for loan evaluated by automated underwriting system.

22 Income Analysis Factors that increase risk Some applications have factors that pose increased risk to lender. If so, higher-than-benchmark income ratios usually won t be accepted. Income Analysis Factors that increase risk For example, some lenders apply stricter standards to high-ltv loans. Many lenders won t accept a high total debt to income ratio if LTV exceeds 90%. Income Analysis ARMs ARMs should be underwritten carefully to make sure that borrower will be able to handle rate and payment increases. ARM borrower should have: strong potential for increased earnings, significant liquid assets, or demonstrated ability to manage finances.

23 Conventional Qualifying Standards Available funds reserves As a general rule, conventional borrower should have at least 2 months of mortgage payments in reserve after closing. Not an absolute requirement, but having a smaller amount in reserve will weaken loan application. Available Funds Gift funds Both Fannie Mae and Freddie Mac set limits on use of gift funds. Donor must be: borrower s relative, fiancé, or domestic partner; borrower s employer; municipality; or nonprofit religious or community organization. Available Funds Gift funds Borrower required to make downpayment of at least 5% of sales price out of her own resources. Rule doesn t apply if LTV is 80% or less.

24 Summary Conventional Qualifying Standards Comprehensive risk assessment Primary risk factors Contributory risk factors Overall layering of risk Representative credit score Total debt to income ratio Housing expense to income ratio Compensating factors Reserves Gift funds Making Loans More Affordable Variety of alternatives are available with conventional financing. Making Loans More Affordable Buydowns In buydown, seller or third party pays lender a lump sum at closing to lower interest rate on buyer s loan. Increases lender s upfront yield. Lowers buyer s monthly payment. Lowers interest rate.

25 Buydowns Buydown plans Buydown can be permanent or temporary. Permanent buydown borrower pays lower interest rate for entire loan term. Temporary buydown borrower pays lower interest rate for first few years of term. Buydowns Permanent buydowns Permanent buydown reduces note rate (rate stated in promissory note). Cost of buydown calculated in terms of points (percentage of loan amount). Buydowns Temporary buydowns Two types of temporary buydown plans: level payment plans, and graduated payment plans.

26 Buydowns Temporary buydowns Level payments Calls for interest rate reduction that stays same throughout buydown period. Buydowns Temporary buydowns Graduated payments Calls for largest payment reduction in first year, with progressively smaller reductions in each remaining year of buydown period buydown: interest rate bought down 3% the first year, 2% the second year, and 1% the third year. Buydowns Temporary buydowns To find cost of temporary buydown: 1. Calculate monthly principal and interest payment without buydown, at full interest rate. 2. Calculate payment with bought-down rate. 3. Subtract bought-down payment from actual payment and multiply by 12 for annual buydown amount. 4. For level payment plan, multiply annual buydown amount by number of years in plan.

27 Buydowns Temporary buydowns Graduated payment buydown is calculated in same way, except each year s buydown must be calculated separately and then added together. Buydowns Buydowns and qualifying rules Permanent buydown Lender qualifies buyer at bought-down interest rate. Temporary buydown Lender may qualify buyer at bought-down rate, note rate, or an intermediate rate. Buydowns Buydowns and qualifying rules With temporary buydown, Fannie Mae generally allows borrower to be qualified using the boughtdown rate if: loan is fixed-rate, or ARM with initial rate adjustment period of 3 years or more, borrower s credit score is 660 or higher, and property is borrower s principal residence.

28 Buydowns Buydowns and qualifying rules Freddie Mac generally allows bought-down rate to be used in qualifying if property is borrower s principal residence. Exceptions for certain low -downpayment programs and cash-out refinancing. Freddie Mac doesn t permit temporary buydowns that last for more than the first three years of the loan term. Buydowns Limits on buydowns Fannie Mae and Freddie Mac limit amount of buydown to percentage of sales price or appraised value, whichever is less. LTV over 90%: 3% limit LTV over 75% but less than 90%: 6% limit LTV 75% or less: 9% limit If limit exceeded, excess is deducted from sales price before calculating maximum loan amount. Buydowns Limits on buydowns Those limits also apply to other contributions buyer accepts from seller or another interested party, such as real estate agent or builder. Limits generally don t apply to someone who isn t participating in transaction, such as employer or family member.

29 Making Loans More Affordable Loans with lower initial payments Loans with lower initial payments may appeal to buyers who expect their incomes to increase steadily. They include: Two-step mortgages Balloon/reset mortgages Interest-only mortgages Loans with Lower Initial Payments Two-step mortgages Characteristics of two-step mortgages: 30-year term. Lender can adjust interest rate once during loan term. Two common types: 5/25 and 7/23. Loans with Lower Initial Payments Two-step mortgages 5/25 loan is automatically adjusted after 5 years to the current market rate. 7/23 loan is automatically adjusted after 7 years to the current market rate. With both types, interest rate cap applies to adjustment.

30 Loans with Lower Initial Payments Balloon/reset mortgages Characteristics of balloon/reset mortgages: Two types: 5/25 and 7/23. Payment amounts based on 30-year amortization schedule. But loan is partially amortized, with balloon payment of entire balance due at end of initial 5- or 7-year period. At end of initial period, borrower may be allowed to reset loan. Loans with Lower Initial Payments Balloon/reset mortgages Under reset option: Reset loan remains in place. Interest rate is set at current market rate (again, interest rate cap may apply). Rate and payment amount are level for remaining 25 or 23 years. Borrower avoids refinancing charges. Loans with Lower Initial Payments Balloon/reset mortgages Borrower not allowed to reset if: payments aren t current, or other liens have attached to property. In that case, borrower will have to refinance or sell property to make balloon payment on balloon/reset mortgage.

31 Loans with Lower Initial Payments Interest-only mortgages Characteristics of typical interest-only mortgage: 30-year loan term. Interest-only payments during specified period at beginning of loan term. At end of interest-only period, payments fully amortized over remainder of loan term. Risk of payment shock: monthly payment likely to rise sharply. Loans with Lower Initial Payments Interest-only mortgages Fannie Mae and Freddie Mac: will buy loans with interest-only periods ranging from under 3 years to over 15 years; won t buy interest-only ARMs unless initial fixed-rate period is three years or more; won t buy interest-only balloon/reset loans. Summary Buydowns & Low Initial Payment Loans Permanent buydown Temporary buydown Level payments Graduated payments Qualifying rate Contribution limits Two-step mortgages Balloon/reset mortgages Interest-only mortgages

32 Making Loans More Affordable Low-downpayment programs Secondary market agencies have developed low - downpayment programs for first-time buyers and others who tend not to have much money saved. Low-Downpayment Programs LTVs and downpayment rules Examples of low -downpayment programs: Loan with 95% LTV and: 3% of downpayment from borrower s funds 2% of downpayment from alternative sources Loan with 97% LTV and: 3% downpayment from borrower s funds 3% contribution to closing costs from alternative sources Low-Downpayment Programs Alternative sources of funds Allowable alternative sources of funds may include gifts, grants, or unsecured loans. Funds may come from: relative, employer, public agency, nonprofit organization, or private foundation.

33 Low-Downpayment Programs Affordable housing programs Many low -downpayment programs are targeted at low - and moderate-income buyers. Buyers qualify if stable monthly income doesn t exceed median income of area. Debt to income ratio rules are relaxed. Income limit may be waived for buyers purchasing homes in low -income or rundown neighborhoods. Low-Downpayment Programs Affordable housing programs Other low -downpayment programs are offered to specific groups such as: teachers, police officers, and firefighters. Making Loans More Affordable Accelerated payment plans Accelerated payment plan allows borrower to repay loan in shorter period than stated term. Pays less interest over life of loan. Builds equity faster.

34 Making Loans More Affordable Accelerated payment plans Loans with accelerated payment plans include: Bi-weekly mortgages Growing equity mortgages (GEMs) Accelerated Payment Plans Bi-weekly mortgages Characteristics of a bi-weekly mortgage: Interest rate and payment amount fixed. Payments made every two weeks (26 per year). Each payment equal to half of monthly payment for 30-year, fully amortized, fixed-rate loan. Loan paid off in years. Accelerated Payment Plans Bi-weekly mortgages Lender usually requires borrower to authorize automatic withdrawal of payments from account. Reduces extra cost of processing 26 payments per year instead of usual 12.

35 Accelerated Payment Plans Growing equity mortgages Characteristics of growing equity mortgage (GEM): Interest rate is fixed over life of loan. Loan must be paid off in 15 years or less. First-year payments of principal and interest based on 15- or 30-year term. Payments increase at specified intervals for all or part of loan term. 100% of payment increase goes to reduce principal balance. Accelerated Payment Plans Growing equity mortgages Payments usually increased each year by fixed percentage, such as 3% or 5%. Over course of repayment period, GEM payment becomes much higher than payment for ordinary loan. Accelerated Payment Plans Growing equity mortgages Length of repayment period depends on interest rate and size of payment increases. GEM with 30-year stated term is usually paid off in 11 to 15 years.

36 Summary Low Downpayment & Accelerated Plans Low-downpayment programs Affordable housing programs Alternative sources of funds Accelerated payment plans Bi-weekly mortgages Growing equity mortgages

37 Real Estate Finance Lesson 10 Cumulative Quiz 1. A loan that complies with Fannie Mae and Freddie Mac guidelines, which can be sold on the secondary market, is a: A. conforming loan B. conventional loan C. jumbo loan D. nonconforming loan 2. If a loan is for a loan amount greater than the conforming loan limits set by Fannie Mae and Freddie Mac, it is known as a/an: A. conforming loan B. conventional loan C. investor loan D. jumbo loan 3. A loan is for $91,000, obtained in order to purchase a $100,000 condominium. This would be categorized as a/an: A. 80% loan B. 90% loan C. 95% loan D. nonconforming loan 4. According to the Homeowners Protection Act, a lender must cancel private mortgage insurance automatically when the loan balance reaches of the property's original value. A. 70% B. 75% C. 78% D. 80% 5. Which of the following is NOT a typical requirement for the use of secondary financing with a conventional loan? A. A prepayment penalty on the second mortgage is not allowed B. Scheduled payments must be due on a regular basis C. The borrower must qualify based on the payments for both loans D. The second mortgage must include a balloon payment 6. An incentive for using a piggyback loan is: A. avoid having to pay private mortgage insurance B. avoid the higher interest rate associated with a jumbo loan C. give the buyer a low initial interest rate, with a rate that will adjust upward later D. Either A or B 2009 Rockwell Publishing 1

38 7. What are the primary risk factors associated with a loan application, according to Fannie Mae guidelines? A. Credit score and loan-to-value ratio B. Credit score and net worth C. Credit score and total obligations ratio D. Loan-to-value ratio and net worth 8. Which of the following is an example of an installment debt that would be considered part of an applicant's total monthly obligations? A. A car loan with six $100 monthly payments remaining B. A credit card balance C. A student loan with five years of monthly payments remaining D. Court-ordered child support payments 9. The one-time fee paid to Fannie Mae or Freddie Mac at closing to compensate for the risks associated with the loan is known as a/an: A. loan-level price adjustment B. origination fee C. private mortgage insurance premium D. title insurance premium 10. Which of the following is NOT a contributing factor that may allow a loan in spite of high income ratios? A. Education or training creating potential for increased earnings B. Energy-efficient home C. Large downpayment D. Use of an adjustable-rate mortgage 11. Fannie Mae and Freddie Mac require private mortgage insurance on all loans with loan-to-value ratios over: A. 80% B. 90% C. 95% D. 97% 12. Which of the following may NOT be a source of gift funds to be applied toward a downpayment? A. A nonprofit community organization B. A real estate agent C. The borrower's employer D. The borrower's relative 2009 Rockwell Publishing 2

39 13. If a seller makes a lump sum payment to the lender in order to lower the buyer's interest rate, this is known as a/an: A. accelerated payment plan B. buydown C. gift fund D. wraparound 14. In this type of temporary buydown, the amount of the actual monthly payment will increase each year during the buydown period: A. Graduated payment buydown B. Growing equity buydown C. Level payment buydown D. Seller financed buydown 15. The lender will use to qualify a buyer using a temporary buydown. A. the bought-down rate B. the note rate C. an intermediate rate between the bought-down and note rates D. Any of the above 16. A loan is for $190,000, in order to purchase a property valued at $200,000. What is the maximum percentage of the property's sales price or appraised value that the seller may contribute in a buydown? A. 3% B. 5% C. 6% D. 9% 17. Which type of mortgage involves an interest rate that is adjusted once during the loan's 30-year term, usually at five or seven years? A. Balloon/reset mortgage B. Growing equity mortgage C. Interest-only mortgage D. Two-step mortgage 18. Which type of mortgage has a period of 10 to 15 years where only interest is paid, followed by fully amortized payments beginning in the 11th or 16th year? A. Balloon/reset mortgage B. Growing equity mortgage C. Interest-only mortgage D. Two-step mortgage 2009 Rockwell Publishing 3

40 19. Which type of mortgage is calculated based on 12 monthly payments, but the borrower accelerates payment by making 26 half payments during a year? A. Balloon/reset mortgage B. Bi-weekly mortgage C. Growing equity mortgage D. Two-step mortgage 20. A growing equity mortgage is distinguished by which characteristic? A. The borrower makes bi-weekly instead of monthly payments B. The interest rate remains fixed over the loan term, but payments go up each year C. The interest rate will be adjusted at one point early in the loan term D. The loan terminates after five or seven years, at which point the borrower may make a balloon payment or renew the loan 2009 Rockwell Publishing 4