RFINANCE6: Loan Terms and Payment
Plans Exam Questions & Answers
(Grade A+)
Graduated Payment Mortgage -
correct answer ✅With a graduated payment mortgage (GPM), the
monthly payment for principal and interest gradually increases by a
certain percentage each year for a certain number of years and
then it levels off for the remaining term of the mortgage. This type
of plan might be especially attractive to someone who is just
starting a career and expects that his or her income will increase
over time. This plan allows a person to start out with a lower
monthly payment than he or she would have with a traditional
fixed-payment plan. The buyer can qualify for the loan based on
expected salary increases along with the expectation that the value
of the home will also increase over time.
With a GPM loan, -
correct answer ✅the buyer may have initial payments that are less
than the interest-only portion of the loan at that point. The interest
owed and not paid in the initial months is added back to the
principal causing what is referred to as negative amortization.
The FHA-245 program is a popular graduated payment mortgage
program. -
correct answer ✅FHA-245 has five plans available. Three of the
five plans permit mortgage payments to increase at a rate of 2.5, 5,
,RFINANCE6: Loan Terms and Payment
Plans Exam Questions & Answers
(Grade A+)
or 7.5 percent during the first 5 years of the loan. The other two
plans permit payments to increase 2 and 3 percent annually over 10
years. Starting at the sixth year of the 5-year plans and the eleventh
year of the 10-year plans, payments will stay the same for the
remaining term of the mortgage. The greater the rate of increase
and the longer the period of increase, the lower the mortgage
payments in the early years.
Below is an example of a fixed-payment mortgage and a graduated-
payment mortgage. -
correct answer ✅The loan amount is $100,000, the interest rate is
8.5 percent, and the term is 30 years (figures are rounded to the
nearest dollar). The rate of increase used in the example is 7.5
percent for each of the first five years.
Year Level Payment Graduated Payment Difference
1 $769 $579 - $190
2 $769 623 - 146
3 $769 669 - 100
4 $769 719 - 50
5 $769 773 + 4
6-30 $769 831 + 62
,RFINANCE6: Loan Terms and Payment
Plans Exam Questions & Answers
(Grade A+)
Note: if you would like to calculate other graduated payment
mortgage amounts, you can search on the Internet using the
keywords "graduated payment mortgage calculator".
Adjustable Rate Mortgage -
correct answer ✅With an adjustable-rate mortgage (ARM), the
interest rate is linked to an economic index. The loan starts at one
rate of interest, but then it fluctuates up or down over the life of
the loan as the index changes. The loan agreement describes how
the interest rate will change and when.
There are many possible ARM indexes. Each one has distinct market
characteristics and fluctuates differently. The most common indexes
are: -
correct answer ✅Constant Maturity Treasury (CMT or TCM) -
These are the weekly or monthly average yields on U.S. Treasury
securities adjusted to constant maturities.
Treasury Bill (T-Bill) - These are based on the results of auctions
that the U.S. Treasury holds for its Treasury bills, notes and bonds.
, RFINANCE6: Loan Terms and Payment
Plans Exam Questions & Answers
(Grade A+)
12-Month Treasury Average (MTA or MAT) - This is a relatively new
ARM index. This index is the 12-month average of the monthly
average yields of U.S. Treasury securities adjusted to a constant
maturity of one year. It is calculated by averaging the previous 12
monthly values of the 1-Year CMT.
Certificate of Deposit Index (CODI) - This is the 12-month average
of the monthly average yields on the nationally published 3-Month
Certificate of Deposit rates.
11th District Cost of Funds Index (COFI) - This index reflects the
weighted-average interest rate paid by 11th Federal Home Loan
Bank District savings institutions for savings and checking accounts,
advances from the FHLB, and other sources of funds. The 11th
District represents the savings institutions (savings & loan
associations and savings banks) headquartered in Arizona,
California and Nevada.
Cost of Savings Index (COSI) - This index is the weighted average of
the rates of interest on the deposit accounts of the federally-
insured depository institution subsidiaries of Golden West Financial
Corporation (GDW). All of the depository institution subsidiaries of
Golden West Financial Corporation operate under the name World
Savings.
London Inter Bank Offering Rates (LIBOR) - London Inter Bank
Offering Rate (LIBOR) is an average of the interest rate on dollar-
Plans Exam Questions & Answers
(Grade A+)
Graduated Payment Mortgage -
correct answer ✅With a graduated payment mortgage (GPM), the
monthly payment for principal and interest gradually increases by a
certain percentage each year for a certain number of years and
then it levels off for the remaining term of the mortgage. This type
of plan might be especially attractive to someone who is just
starting a career and expects that his or her income will increase
over time. This plan allows a person to start out with a lower
monthly payment than he or she would have with a traditional
fixed-payment plan. The buyer can qualify for the loan based on
expected salary increases along with the expectation that the value
of the home will also increase over time.
With a GPM loan, -
correct answer ✅the buyer may have initial payments that are less
than the interest-only portion of the loan at that point. The interest
owed and not paid in the initial months is added back to the
principal causing what is referred to as negative amortization.
The FHA-245 program is a popular graduated payment mortgage
program. -
correct answer ✅FHA-245 has five plans available. Three of the
five plans permit mortgage payments to increase at a rate of 2.5, 5,
,RFINANCE6: Loan Terms and Payment
Plans Exam Questions & Answers
(Grade A+)
or 7.5 percent during the first 5 years of the loan. The other two
plans permit payments to increase 2 and 3 percent annually over 10
years. Starting at the sixth year of the 5-year plans and the eleventh
year of the 10-year plans, payments will stay the same for the
remaining term of the mortgage. The greater the rate of increase
and the longer the period of increase, the lower the mortgage
payments in the early years.
Below is an example of a fixed-payment mortgage and a graduated-
payment mortgage. -
correct answer ✅The loan amount is $100,000, the interest rate is
8.5 percent, and the term is 30 years (figures are rounded to the
nearest dollar). The rate of increase used in the example is 7.5
percent for each of the first five years.
Year Level Payment Graduated Payment Difference
1 $769 $579 - $190
2 $769 623 - 146
3 $769 669 - 100
4 $769 719 - 50
5 $769 773 + 4
6-30 $769 831 + 62
,RFINANCE6: Loan Terms and Payment
Plans Exam Questions & Answers
(Grade A+)
Note: if you would like to calculate other graduated payment
mortgage amounts, you can search on the Internet using the
keywords "graduated payment mortgage calculator".
Adjustable Rate Mortgage -
correct answer ✅With an adjustable-rate mortgage (ARM), the
interest rate is linked to an economic index. The loan starts at one
rate of interest, but then it fluctuates up or down over the life of
the loan as the index changes. The loan agreement describes how
the interest rate will change and when.
There are many possible ARM indexes. Each one has distinct market
characteristics and fluctuates differently. The most common indexes
are: -
correct answer ✅Constant Maturity Treasury (CMT or TCM) -
These are the weekly or monthly average yields on U.S. Treasury
securities adjusted to constant maturities.
Treasury Bill (T-Bill) - These are based on the results of auctions
that the U.S. Treasury holds for its Treasury bills, notes and bonds.
, RFINANCE6: Loan Terms and Payment
Plans Exam Questions & Answers
(Grade A+)
12-Month Treasury Average (MTA or MAT) - This is a relatively new
ARM index. This index is the 12-month average of the monthly
average yields of U.S. Treasury securities adjusted to a constant
maturity of one year. It is calculated by averaging the previous 12
monthly values of the 1-Year CMT.
Certificate of Deposit Index (CODI) - This is the 12-month average
of the monthly average yields on the nationally published 3-Month
Certificate of Deposit rates.
11th District Cost of Funds Index (COFI) - This index reflects the
weighted-average interest rate paid by 11th Federal Home Loan
Bank District savings institutions for savings and checking accounts,
advances from the FHLB, and other sources of funds. The 11th
District represents the savings institutions (savings & loan
associations and savings banks) headquartered in Arizona,
California and Nevada.
Cost of Savings Index (COSI) - This index is the weighted average of
the rates of interest on the deposit accounts of the federally-
insured depository institution subsidiaries of Golden West Financial
Corporation (GDW). All of the depository institution subsidiaries of
Golden West Financial Corporation operate under the name World
Savings.
London Inter Bank Offering Rates (LIBOR) - London Inter Bank
Offering Rate (LIBOR) is an average of the interest rate on dollar-
