A homeowner replaces an existing mortgage with a new loan, receives no cash beyond closing adjustments, and uses all proceeds to pay off the old lien and refinance costs. How is the transaction best classified?
Correct Answer
B) Rate-and-term refinance
Why this is correct: A rate-and-term refinance is defined as replacing an existing mortgage primarily to change the interest rate, loan term, or loan type, without taking cash out. The proceeds are used solely to pay off the old debt and closing costs. Why the other choices are wrong: 'Purchase-money mortgage' is wrong because this transaction is not financing the acquisition of a new property. 'Construction-only loan' is wrong because the loan is not for building a new structure. 'Reverse mortgage' is wrong because that is a specific product where the borrower receives payments and does not make monthly payments, which is not described here. Exam tip: Key indicator of a rate-and-term refi: No cash goes to the borrower beyond paying off the old loan and closing costs.
Why This Is the Correct Answer
Why this is correct: A rate-and-term refinance is defined as replacing an existing mortgage primarily to change the interest rate, loan term, or loan type, without taking cash out. The proceeds are used solely to pay off the old debt and closing costs. Why the other choices are wrong: 'Purchase-money mortgage' is wrong because this transaction is not financing the acquisition of a new property. 'Construction-only loan' is wrong because the loan is not for building a new structure. 'Reverse mortgage' is wrong because that is a specific product where the borrower receives payments and does not make monthly payments, which is not described here. Exam tip: Key indicator of a rate-and-term refi: No cash goes to the borrower beyond paying off the old loan and closing costs.
More Mortgage Knowledge Questions
In a closing-readiness check, a risk reviewer sees facts tied to TILA Truth in Advertising. What should the file reflect?
In a training scenario, a trainee asks which official source controls FHA single-family origination policy. What action best follows the rule?
A compliance analyst compares the file facts with LTV Ratio Calculation during a licensing team review. Which conclusion is accurate?
A branch manager asks about a loan file because a trainee asks which official source controls FHA single-family origination policy. What should happen?
The loan team compares the file facts with ARM Cap Structures during a borrower follow-up call. Which conclusion is accurate?
A borrower has a 30-year fixed-rate mortgage with monthly principal and interest of $1,450. Property taxes increase, and taxes are paid through escrow. What can happen to the total monthly payment?
A loan has an outstanding principal balance of $240,000 and a 6% annual interest rate. Using simple monthly accrual, how much interest accrues for one month?
An annual escrow analysis for a current borrower shows a $780 shortage. One month's escrow payment is $600. The servicer elects to require repayment over the shortest installment period permitted by Regulation X for this shortage. What schedule is permitted?
What does an amortization schedule show for each scheduled payment?
A monthly principal-and-interest payment is $1,800, of which $1,250 is interest. How much principal is paid that month?
People Also Study
Federal Mortgage-Related Laws
24% of exam
Mortgage Loan Origination Activities
27% of exam
Ethics, Fraud & Consumer Protection
18% of exam
Uniform State Test Content
11% of exam
Related Study Resources
Previous Question
A pre-closing checklist raises a Conforming Loan Limits question for the MLO. What answer should guide the file?
Next Question
A property appraises at $400,000. The borrower takes a first mortgage of $300,000 and a simultaneous second of $40,000. Using $400,000 as the property value, what are the first-mortgage LTV and combined LTV?