Free practice
General financing concepts: interest, amortization, points, and loan-to-value
Finish →Question 1 of 40
Which amount is the principal of a real estate loan?
Reveal answer
Correct answer: The unpaid loan balance
Principal is the unpaid loan balance. Interest is the cost of borrowing, and future payments can include both principal and interest.
Question 2 of 40
A $180,000 principal balance remains unchanged for six months at 5% simple annual interest. How much interest accrues?
Reveal answer
Correct answer: $4,500
Interest = principal × annual rate × time in years. $180,000 × 0.05 = $9,000 per year; six months is 6/12 = 0.5 year; $9,000 × 0.5 = $4,500.
Question 3 of 40
Why can a loan's annual percentage rate differ from its note interest rate?
Reveal answer
Correct answer: APR reflects certain finance charges and their timing as well as interest.
The note rate determines interest under the loan terms. APR also reflects certain finance charges and their timing, making it a different cost measure.
Question 4 of 40
A $200,000 loan bears 6% annual interest. For the first month use the annual rate divided by 12. A $1,300 payment covers principal and interest, with no fees. What balance remains after that payment?
Reveal answer
Correct answer: $199,700
Monthly interest is $200,000 × 0.06 ÷ 12 = $1,000. Principal paid is $1,300 − $1,000 = $300. Remaining balance is $200,000 − $300 = $199,700.
Question 5 of 40
On a fully amortizing fixed-rate loan with level principal-and-interest payments, how does the payment allocation change as the balance falls?
Reveal answer
Correct answer: The interest portion falls and the principal portion rises.
Interest is calculated on a declining balance. With the rate and total principal-and-interest payment fixed, less interest leaves more of each payment for principal.
Question 6 of 40
A loan accrues $1,100 in interest this month. The borrower pays $900, and the contract adds the unpaid $200 interest to principal. What has occurred?
Reveal answer
Correct answer: Negative amortization
The unpaid interest is $1,100 − $900 = $200. Adding that amount to principal increases the balance, which is negative amortization.
Question 7 of 40
A buyer borrows $320,000 to purchase a $400,000 home. The lender charges 1.5 points on the loan. What is the point charge?
Reveal answer
Correct answer: $4,800
One point is 1% of the loan. Convert 1.5 points to 0.015 and multiply $320,000 × 0.015 = $4,800.
Question 8 of 40
A property has a lender-accepted value of $500,000 and a single $375,000 loan. What is the loan-to-value ratio?
Reveal answer
Correct answer: 75%
LTV = loan ÷ value × 100. $375,000 ÷ $500,000 = 0.75; 0.75 × 100 = 75%.
Question 9 of 40
A $450,000 purchase appraises at $420,000. The lender limits the loan to 80% of the lower of price or appraised value. What is the maximum loan?
Reveal answer
Correct answer: $336,000
The lower value is $420,000. Multiply $420,000 × 0.80 = $336,000. The higher purchase price does not control the stated lending calculation.
Question 10 of 40
A $400,000 property secures a $280,000 first loan and a $40,000 second loan. What is the combined loan-to-value ratio?
Reveal answer
Correct answer: 80%
Combined debt is $280,000 + $40,000 = $320,000. Divide $320,000 by $400,000 to get 0.80, then multiply by 100 for 80% combined LTV.
Question 11 of 40
A lender offers a lower note rate in exchange for discount points. What do the discount points represent?
Reveal answer
Correct answer: An upfront charge paid to obtain the lower interest rate
Discount points are an upfront charge used to obtain a lower interest rate. They differ from a tax reserve, a price concession, and a payment reducing principal.
Question 12 of 40
Paying $3,600 in extra upfront discount costs saves $75 monthly. Using a simple cash-flow break-even calculation, after how many months do the savings equal the cost?
Reveal answer
Correct answer: 48 months
Simple break-even months = extra upfront cost ÷ monthly savings. $3,600 ÷ $75 = 48 months.
Question 13 of 40
A borrower pays the full monthly interest on a loan but pays no principal during an interest-only period. What happens to principal during that period, assuming no other charges or advances?
Reveal answer
Correct answer: It remains unchanged.
Paying exactly the accrued interest satisfies the interest charge but makes no principal reduction. No unpaid interest is left to increase principal.
Question 14 of 40
A loan's scheduled payments reduce principal, but a remaining principal balance must be paid at maturity. Which description fits?
Reveal answer
Correct answer: A partially amortizing loan with a balloon
Partial amortization reduces some principal without retiring all of it through the scheduled periodic payments. The remaining maturity balance is a balloon.
Question 15 of 40
Which statement describes California Civil Code section 2954.8 for covered advance property-tax and insurance funds?
Reveal answer
Correct answer: It requires at least 2% simple annual interest on the covered money held.
California Civil Code section 2954.8 requires covered institutions to pay at least 2% simple annual interest on covered advance property-related funds. The base is the money held, not the property value or mortgage balance.
Question 16 of 40
A buyer is told that paying two discount points reduces a quoted note rate by exactly two percentage points. What is the best assessment?
Reveal answer
Correct answer: Incorrect; points measure the charge, and the actual rate reduction depends on the quote.
Points express a charge as a percentage of the loan amount. They do not establish a one-for-one relationship with changes in the note rate.
Question 17 of 40
A fixed-rate borrower notices that the total monthly amount collected by the servicer rose, although scheduled principal and interest did not change. Which explanation is consistent with those facts?
Reveal answer
Correct answer: The amount collected for property taxes or insurance increased.
A fixed note rate and level principal-and-interest payment do not freeze tax or insurance collections. An increase in those collections can raise the total remittance.
Question 18 of 40
A property worth $600,000 has one $450,000 loan and no other liens. Before transaction costs, how much equity does the owner have?
Reveal answer
Correct answer: $150,000
Equity equals property value minus secured debt. $600,000 − $450,000 = $150,000 before transaction costs.
Question 19 of 40
A borrower prepays $10,000 of principal on a $250,000 loan. At the next monthly interest calculation, the annual rate remains 6%, divided by 12, with no other balance changes. How much lower is that month's interest because of the prepayment?
Reveal answer
Correct answer: $50
Before prepayment: $250,000 × 0.06 ÷ 12 = $1,250. After prepayment the balance is $240,000; $240,000 × 0.06 ÷ 12 = $1,200. Interest decreases $1,250 − $1,200 = $50.
Question 20 of 40
Two quotes have the same loan amount, note rate, term, and payment schedule, but one requires substantially higher upfront finance charges. What is the strongest conclusion?
Reveal answer
Correct answer: Matching note rates do not establish equal borrowing costs; compare charges and APR.
The note rate alone does not account for upfront finance charges. APR and the charges help compare credit costs when other loan terms match.
Question 21 of 40
Under California Civil Code section 2954.8, when must interest on covered advance property-related funds be credited?
Reveal answer
Correct answer: Annually or upon account termination, whichever occurs earlier
California Civil Code section 2954.8 specifies annual crediting or crediting upon termination of the account, whichever is earlier.
Question 22 of 40
A $120,000 balance accrues $1,000 interest. A $700 payment is applied to interest, and the unpaid interest is added to principal. What is the new principal balance?
Reveal answer
Correct answer: $120,300
Unpaid interest = $1,000 − $700 = $300. Capitalizing it gives $120,000 + $300 = $120,300, an instance of negative amortization.
Question 23 of 40
A buyer can pay $4,000 extra upfront to save $100 each month and expects to keep the loan for 24 months. Using just these cash flows, what is the result at payoff?
Reveal answer
Correct answer: The savings fall short of the cost by $1,600.
Savings are 24 × $100 = $2,400. Subtract savings from the $4,000 cost: $4,000 − $2,400 = $1,600 unrecovered. Break-even would require $4,000 ÷ $100 = 40 months.
Question 24 of 40
Two borrowers have equal loan balances and equal annual simple-interest rates for the same month. One makes an interest-only payment; the other pays all interest plus some principal. Which comparison is correct for that month's interest?
Reveal answer
Correct answer: Both accrue the same interest for that month; their principal repayment differs.
Equal balances, rates, and time periods produce equal simple interest. The difference in payment above accrued interest determines whether principal is reduced.
Question 25 of 40
A loan officer calculates LTV by dividing the property value by the loan amount. What correction is needed?
Reveal answer
Correct answer: Divide the loan amount by the value basis, then multiply by 100.
LTV compares debt to collateral value: loan amount ÷ value basis × 100. The proposed fraction reverses numerator and denominator.
Question 26 of 40
A lender permits a 75% LTV loan on a $480,000 value basis. What loan amount corresponds to that limit?
Reveal answer
Correct answer: $360,000
Loan amount = value × LTV expressed as a decimal. $480,000 × 0.75 = $360,000.
Question 27 of 40
A statement shows $1,800 collected for the month: $1,500 principal and interest plus $300 for taxes and insurance. Accrued loan interest is $1,200. How much principal is repaid?
Reveal answer
Correct answer: $300
Exclude the $300 tax-and-insurance collection: $1,800 − $300 = $1,500 for principal and interest. Then $1,500 − $1,200 interest = $300 principal repaid.
Question 28 of 40
Which characteristic distinguishes a fully amortizing repayment schedule from a partially amortizing schedule?
Reveal answer
Correct answer: Scheduled payments retire the principal by maturity.
Full amortization pays principal down to zero by maturity through the scheduled payments. Partial amortization leaves a remaining principal amount due at maturity.
Question 29 of 40
Two loans are secured by separate properties, each valued at $500,000. One loan is $350,000 and the other is $425,000. Which comparison is correct before transaction costs and with no other liens?
Reveal answer
Correct answer: The $425,000 loan has higher LTV and less equity.
$350,000 ÷ $500,000 × 100 = 70% LTV, with $150,000 equity. $425,000 ÷ $500,000 × 100 = 85% LTV, with $75,000 equity. Higher debt against equal value means higher LTV and less equity.
Question 30 of 40
For a covered California advance-funds account under Civil Code section 2954.8, a lender pays 2% interest but imposes an account-maintenance fee that reduces the effective interest paid below 2%. Which statement is correct?
Reveal answer
Correct answer: The fee conflicts with the statute's restriction on charges that reduce interest below 2%.
California Civil Code section 2954.8(b) bars maintenance or disbursement charges that result in less than 2% annual interest being paid on covered funds. A stated rate alone does not satisfy that restriction.
Question 31 of 40
An interest-only loan has a $150,000 unchanged balance and a 4.8% annual rate. Using annual interest divided by 12, what monthly interest payment covers the accrued interest?
Reveal answer
Correct answer: $600
Annual interest is $150,000 × 0.048 = $7,200. Monthly interest is $7,200 ÷ 12 = $600. Paying $600 covers interest without reducing principal.
Question 32 of 40
A loan has level scheduled payments and a balloon due at maturity. A salesperson says the balloon proves the loan has negative amortization. What is the best response?
Reveal answer
Correct answer: Incorrect; a balloon can remain after partial principal repayment without any capitalized interest.
A balloon identifies a remaining amount due at maturity, not how the balance developed. Partial amortization can leave a balloon while reducing principal; negative amortization specifically adds unpaid interest to principal.
Question 33 of 40
Which statement distinguishes an origination charge from discount points?
Reveal answer
Correct answer: An origination charge compensates for making the loan, while discount points obtain a lower rate.
Origination charges compensate for originating the loan. Discount points are an upfront charge used to obtain a lower interest rate. Neither is a principal repayment or a tax reserve.
Question 34 of 40
A $300,000 loan balance is unchanged while the lender's accepted property value rises from $400,000 to $500,000. What is the new LTV?
Reveal answer
Correct answer: 60%
Use the new value: $300,000 ÷ $500,000 = 0.60; multiply by 100 for 60% LTV. The earlier LTV was $300,000 ÷ $400,000 × 100 = 75%.
Question 35 of 40
A home costs $410,000 but appraises for $400,000. The lender will lend 80% of the lower figure. With no other financing, how much of the purchase price must the buyer fund, excluding closing costs?
Reveal answer
Correct answer: $90,000
The lending base is $400,000. The loan is $400,000 × 0.80 = $320,000. Buyer funds required for the price are $410,000 − $320,000 = $90,000.
Question 36 of 40
A proposed fixed-rate amortization schedule shows the same principal-and-interest payment each month, a falling principal balance, and an increasing interest portion. What is the defect in that schedule?
Reveal answer
Correct answer: At the unchanged rate, interest should decrease as the balance falls.
At a fixed rate applied over equal payment periods, a smaller outstanding balance produces less interest. With a level payment, the principal portion should consequently increase.
Question 37 of 40
A lender quotes a $5,000 charge equal to two points. What loan amount is the charge based on?
Reveal answer
Correct answer: $250,000
Two points equals 2%, or 0.02, of the loan. Solve $5,000 = loan × 0.02: $5,000 ÷ 0.02 = $250,000.
Question 38 of 40
A covered California account under Civil Code section 2954.8 holds an unchanged $6,000 in advance property-tax funds for one full year. At the statutory minimum simple-interest rate, how much interest is owed?
Reveal answer
Correct answer: $120
California's minimum rate for the covered funds is 2% simple annual interest. Interest = $6,000 × 0.02 × 1 year = $120.
Question 39 of 40
Which formula calculates simple interest when the stated rate is annual?
Reveal answer
Correct answer: Principal × annual rate × time in years
Simple interest equals principal times rate times time. When the rate is annual, the time must be expressed in years, including fractional years.
Question 40 of 40
A property has both a first and a second mortgage. An analyst divides only the first mortgage balance by property value and labels the result combined LTV. What is the error?
Reveal answer
Correct answer: Combined LTV must include the second mortgage in the debt numerator.
First-loan LTV includes just the first loan; combined LTV includes additional secured loans. Omitting the second mortgage understates combined debt relative to the property value.
Ready when you are
This free set is 40 questions from one objective. A plan opens 3240 questions across the whole California exam, plus mock exams, spoken rationales, and audio you can study while driving.