Home Loan

### What is the primary purpose of a home loan? - [x] To finance the purchase of residential property - [ ] To fund home improvement projects - [ ] To pay for insurance premiums - [ ] To invest in mutual funds > **Explanation:** The primary purpose of a home loan is to finance the purchase of residential property, helping individuals buy homes. ### What does it mean to "secure" a home loan? - [ ] It guarantees approval from the lender. - [x] The home is pledged as collateral for the loan. - [ ] The borrower insures the property against damage. - [ ] The interest rate remains variable. > **Explanation:** A home loan is "secured" by the home itself, meaning the property acts as collateral. If the borrower defaults, the lender can claim ownership of the property. ### What is a key feature of a fixed-rate mortgage? - [x] Stable monthly payments over the term of the loan - [ ] Varying interest rates based on market conditions - [ ] Payments that only cover the interest - [ ] Payments that decrease over time > **Explanation:** A fixed-rate mortgage features stable monthly payments and a constant interest rate throughout the loan term, providing predictability for the borrower. ### What is the significance of a credit score in obtaining a home loan? - [ ] It has no impact on loan approval. - [x] It helps determine eligibility and loan terms. - [ ] It only affects the interest rate. - [ ] It specifies the type of property that can be purchased. > **Explanation:** A good credit score helps determine a borrower's eligibility for a home loan and can influence the terms and interest rates offered by lenders. ### How does private mortgage insurance (PMI) benefit the lender? - [ ] It lowers the loan's interest rate. - [ ] It extends the repayment period. - [x] It protects against borrower default. - [ ] It covers property damage. > **Explanation:** Private mortgage insurance (PMI) benefits the lender by protecting them against possible losses if the borrower defaults on the loan, especially when the down payment is less than 20%. ### Why might a borrower choose an adjustable-rate mortgage? - [ ] For guaranteed stable monthly payments. - [x] To benefit from initially lower interest rates. - [ ] To avoid securing the loan with collateral. - [ ] To decrease loan term without penalties. > **Explanation:** A borrower might choose an adjustable-rate mortgage to take advantage of initially lower interest rates, which may result in lower initial monthly payments. ### What does the term "amortization" refer to in mortgages? - [ ] Increasing the principal balance over time. - [ ] Payment of only interest on the loan. - [x] The gradual repayment of the loan principal and interest. - [ ] Shortening the loan term through extra payments. > **Explanation:** Amortization refers to the process of gradually repaying both the loan principal and interest over the loan term through regular monthly payments. ### What is an interest-only mortgage? - [x] A loan where the borrower pays only interest for a set period. - [ ] A loan where the principal is paid off first. - [ ] A loan that requires no monthly payments. - [ ] A short-term loan with a balloon payment at the end. > **Explanation:** An interest-only mortgage requires the borrower to pay only the interest portion for a specified period, after which payments typically increase to cover the principal as well. ### In a mortgage agreement, what is "principal"? - [ ] The interest charged on the loan. - [x] The original sum of money borrowed. - [ ] The collateral set against the loan. - [ ] The total repayment amount including interest. > **Explanation:** The principal is the original sum of money borrowed in a mortgage loan, which the borrower must repay to the lender over the loan term. ### What financial ratio do lenders commonly assess to determine home loan eligibility? - [ ] Price-to-earnings ratio - [ ] Quick ratio - [ ] Current ratio - [x] Debt-to-income ratio > **Explanation:** Lenders commonly assess the debt-to-income ratio to determine a borrower's home loan eligibility. This ratio compares an individual's monthly debt payments to their monthly income, helping assess financial capacity to manage new debt.