Refinancing Your Mortgage

Question 1

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As a rule of thumb, how many percentage points lower should your new mortgage rate be for a refinance to save you money?

(A) 2.0%.

(B) 0.5%.

(C) 1.0%.

(D) 3.0%.

Of course, there aren't really hard and fast refinance 'rules' out there. Everyone's situation is different, and the rule of thumb may or may not apply. But the longstanding rule of thumb regarding refinancing is to refinance if the mortgage rate is 2 percent or lower. The underlying concept behind this rule, which is likely true in most situations, is that when you refinance, you should recoup your closing costs through reduced payments in a reasonable period of time.

Question 2

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The "loan-to-value" ratio for a mortgage refinance is based on:

(A) The original loan amount and the current appraised value of your home.

(B) The current outstanding loan balance and the current appraised value of the home.

(C) The current outstanding loan balance and the purchase price of the home.

(D) Loan-to-values are not calculated when refinancing a mortgage.

The loan-to-value or LTV for a loan is calculated as the amount of the mortgage lien (or outstanding loan balance) divided by the home's appraised value. For example, a borrower refinancing a mortgage with an outstanding balance of $150,000 for a home appraised at $200,000 would have a loan-to-value ratio of 75% ($150,000 / $200,000).

Question 3

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Incorrect. You answered "". But the correct answer is "". Please make sure and read the information at the bottom to better understand the answer.

Which of the following is the most popular reason for refinancing a home mortgage?

(A) Lowering monthly payment.

(B) Shortening the loan term.

(C) Taking cash out as an alternative to a home equity loan.

(D) All of the above.

There are many legitimate benefits for refinancing a home mortgage. A lower interest rate for the same term loan can result in a substantial monthly payment reduction and payment of lower interest charges over the long term. Moving from a 30-year mortgage to a 15-year mortgage can also lower interest charges over time. Finally, if you have sufficient equity in your home, you might find it more beneficial to do a 'cash-out' refinance to pay for a home improvement project.

Question 4

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Incorrect. You answered "". But the correct answer is "". Please make sure and read the information at the bottom to better understand the answer.

If you have PMI on your existing mortgage, refinancing into a new mortgage can remove it if:

(A) You've been current on all of your loan payments since you first purchased the home.

(B) The loan balance on your refinanced loan is less than or equal to 80% of the home's current value.

(C) Your new rate is 2.0% lower than your current rate.

(D) All of the above.

Private mortgage insurance, or PMI, is required by most lenders if the loan-to-value ratio of the home mortgage is greater than 80%. If you´ve owned your home for enough time and the home has appreciated greatly in value, refinancing can force the removal of the PMI requirement. Otherwise, your lender must cancel PMI when the loan-to-value of the home´s original value drops below 78%.

Question 5

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Incorrect. You answered "". But the correct answer is "". Please make sure and read the information at the bottom to better understand the answer.

Which of the following should NOT be done in preparation for refinancing your mortgage?

(A) Make sure your credit report and credit score are in good shape.

(B) Build up your cash reserves.

(C) Gather all of the required paperwork.

(D) Stop making your mortgage payments during the refinance process.

Having a strong FICO score will help you obtain the lowest rate possible on your new mortgage, and having sufficient cash reserves will help you cover the closing costs of the refinance. A refinance is every bit as paperwork intensive as obtaining your original mortgage, so you must be prepared to document all aspects of your income and expenses properly. And finally, stopping payments on a loan is never a good idea.

Question 6

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Incorrect. You answered "". But the correct answer is "". Please make sure and read the information at the bottom to better understand the answer.

Which of the following is NOT a requirement to be eligible for a reverse mortgage?

(A) Be age 62 or older.

(B) You're home must be a secondary residence or vacation home.

(C) Be current on your property tax and homeowner's insurance payments

(D) Live in the home as your primary residence.

A reverse mortgage allows you to access the equity in your home to supplement your income. To be eligible, all borrowers must be at least 62 years old, live in their home as their primary residence, and be up-to-date on all loan, insurance and property tax payments.

Question 7

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Incorrect. You answered "". But the correct answer is "". Please make sure and read the information at the bottom to better understand the answer.

When is refinancing your mortgage not a good idea?

(A) You've had your mortgage for a long time.

(B) Your current mortgage has a prepayment penalty.

(C) You plan to move from your home in the next few years.

(D) All of the above.

If you´ve had your 30-year mortgage for 25 years, restarting the clock to a 30-year or 15-year mortgage will only result in you paying more in interest charges than you otherwise would if you kept your existing mortgage. Refinancing when you have a mortgage prepayment penalty will probably negate the benefits of the refinance. Likewise, if you only plan on being in your home for a short period, you probably won´t be able to recoup the closing costs from the refinance.

Question 8

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Incorrect. You answered "". But the correct answer is "". Please make sure and read the information at the bottom to better understand the answer.

Most "no closing costs" refinancing offers:

(A) Allow you to not pay any closing costs out of pocket by adding the actual closing costs to your loan balance.

(B) Mortgage refinances don't have closing costs, so they're simple marketing ploys.

(C) Some lenders absorb closing costs to attract customers.

(D) None of the above.

Most 'no closing cost' offers are a 'pay me now or pay me later' premise. Lenders will either add the closing costs to your existing loan balance and base your payments on the higher balance or increase your interest rate to recoup the closing costs through higher interest payments over the loan term.

Question 9

Correct!

Incorrect. You answered "". But the correct answer is "". Please make sure and read the information at the bottom to better understand the answer.

If you want to shorten the length of your existing mortgage loan, you can:

(A) Refinancing into a shorter-term loan.

(B) Making occasional lump-sum payments to your lender.

(C) Switching to a bi-weekly payment schedule.

(D) All of the above.

Making bi-weekly or lump-sum payments for your mortgage will pay down the principal on the loan more quickly and reduce overall interest payments over the loan term. That will result in you paying the loan off sooner than if you had stuck with the original payment plan. Moving from a 30-year mortgage to a 15-year mortgage will also result in a shorter repayment period, provided that you have more than 15 years to go on your 30-year mortgage.

Question 10

Correct!

Incorrect. You answered "". But the correct answer is "". Please make sure and read the information at the bottom to better understand the answer.

You might want to consider refinancing into a higher rate loan if:

(A) You change from an Adjustable Rate to a Fixed Rate to gain stable rates for the remainder of the loan term.

(B) You want to accelerate the payoff of your loan.

(C) You get to finance your closing costs as part of the refinancing program.

(D) All of the above.

Changing to a higher-rate mortgage will almost always result in you paying more interest charges over the loan repayment term and is therefore seldom recommended. Where it might make sense is if you´re looking for the peace-of-mind that having a stable interest rate over the rest of the loan term, which a fixed-rate mortgage offers, can provide. With an adjustable-rate mortgage, you risk rate adjustments that may make your mortgage payments unaffordable. Refinancing to a fixed-rate loan will provide a stable payment that might help you stay in your home for the remainder of the loan term.

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