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DSST Personal Finance study materials
DSST Personal Finance study resources

DSST Personal Finance practice questions

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Question 1Credit and debt

A credit card's grace period is best described as the interval during which the cardholder may do which of the following?

  1. Withdraw cash without any fee
  2. Dispute a charge after the statement closes
  3. Skip the minimum payment without penalty
  4. Pay the new balance in full and avoid a finance charge on purchases Correct answer.

Explanation

The grace period is the window between the statement closing date and the payment due date. Paying the full statement balance inside that window prevents interest from being charged on new purchases, provided the prior balance was also paid in full.

Question 2Credit and debt

Which figure on a credit card statement represents the portion of the balance that must be paid to keep the account current?

  1. The credit limit
  2. The statement closing date
  3. The minimum payment Correct answer.
  4. The annual percentage rate

Explanation

The minimum payment is the smallest amount the issuer requires by the due date to avoid delinquency. Paying only that amount keeps the account current but allows the remaining balance to keep accruing interest.

Question 3Credit and debt

A borrower's FICO score is most heavily influenced by which factor?

  1. Payment history Correct answer.
  2. The borrower's income level
  3. The number of credit cards the borrower owns
  4. The borrower's length of employment

Explanation

Payment history carries the largest weight in the standard FICO model, generally about 35 percent. A record of on-time payments therefore matters more than most other behaviors a borrower can control.

Question 4Credit and debt

Which type of loan is secured by real property and typically carries the lowest interest rate for a consumer borrower?

  1. A home equity loan Correct answer.
  2. A store-branded retail card
  3. A payday advance
  4. An unsecured personal line of credit

Explanation

A home equity loan is secured by the borrower's house, which lowers the lender's risk and generally produces a lower rate than unsecured borrowing. The trade-off is that the home can be lost if the loan defaults.

Question 5Credit and debt

A consumer who wants to check a credit report for errors at no cost may obtain one from each nationwide credit bureau how often?

  1. Once every twelve months Correct answer.
  2. Only when a lender requests it
  3. Once every five years
  4. Only after being denied credit

Explanation

Federal law entitles consumers to one free disclosure from each of the nationwide credit bureaus every twelve months. Reviewing all three reports helps surface errors that may exist at only one bureau.

Question 6Credit and debt

Which action most directly reduces a borrower's credit utilization ratio?

  1. Paying down revolving balances while keeping limits open Correct answer.
  2. Transferring a balance to a new card
  3. Closing a card that carries a zero balance
  4. Opening several new accounts in one month

Explanation

Utilization compares revolving balances to total available limits, so lowering balances while preserving limits reduces the ratio. Closing accounts or adding debt can push the ratio in the opposite direction.

Question 7Credit and debt

In a Chapter 7 bankruptcy, which of the following best describes the typical treatment of unsecured debts such as credit card balances?

  1. They are repaid in full over five years
  2. They are generally discharged after nonexempt assets are liquidated Correct answer.
  3. They remain collectible indefinitely
  4. They are converted into secured debt

Explanation

Chapter 7 involves liquidation of nonexempt assets and then discharge of most remaining unsecured debts. Certain obligations, such as most student loans and recent taxes, generally survive the discharge.

Question 8Credit and debt

Which statement accurately describes the difference between a charge card and a credit card?

  1. A credit card must be paid in full each month
  2. A credit card never imposes a credit limit
  3. A charge card requires full payment of the balance each billing cycle Correct answer.
  4. A charge card permits revolving balances at a lower APR

Explanation

Charge cards require the full statement balance to be paid each cycle and do not offer revolving credit. Credit cards extend a revolving line that allows a balance to carry forward with interest.

Question 9Credit and debt

A borrower has a $3,000 balance at an 18 percent annual percentage rate and makes only the minimum payment each month. What is the most likely consequence?

  1. The credit limit will be increased to offset interest
  2. The APR will automatically drop after six months
  3. The balance will be repaid faster than with fixed payments
  4. The total interest paid will be far higher than the stated balance Correct answer.

Explanation

Minimum payments are often set near 1 to 3 percent of the balance, so most of each payment goes to interest and principal declines slowly. Over time the accumulated finance charges can approach or exceed the original balance.

Question 10Credit and debt

A credit card advertises a 0 percent introductory APR on purchases for twelve months. If the cardholder carries a purchase balance past the promotional period, what happens?

  1. The promotional rate converts to a fixed 0 percent permanently
  2. The issuer must forgive the remaining balance
  3. The balance remains interest-free until paid
  4. The standard purchase APR applies to the remaining balance Correct answer.

Explanation

Introductory APRs are temporary, and once the promotional window closes the standard rate applies to balances still outstanding. Some issuers also apply the standard rate retroactively if a payment is missed.

Question 11Credit and debt

Which federal law gives a consumer the right to dispute a billing error and requires the issuer to investigate within a defined period?

  1. The Fair Credit Reporting Act
  2. The Truth in Lending Act
  3. The Fair Debt Collection Practices Act
  4. The Fair Credit Billing Act Correct answer.

Explanation

The Fair Credit Billing Act establishes the procedure for disputing billing errors and requires the creditor to acknowledge and resolve the dispute within set timelines. The other statutes address reporting accuracy, collection conduct, and disclosure of credit terms respectively.

Question 12Credit and debt

A borrower receives a letter from a collection agency demanding payment on a debt. Which right does the Fair Debt Collection Practices Act provide?

  1. The right to obtain the original signed contract at no cost
  2. The right to have the debt erased from the credit report immediately
  3. The right to require the collector to stop all contact permanently
  4. The right to demand written validation of the debt within thirty days Correct answer.

Explanation

The FDCPA allows a consumer to request written validation of a debt within thirty days of initial contact. Until validation is provided, the collector must generally pause collection activity on the disputed debt.

Question 13Credit and debt

A consumer co-signs a loan for a friend. Which statement best describes the co-signer's legal obligation?

  1. The co-signer is responsible only if the friend agrees in writing
  2. The co-signer's obligation ends when the friend makes twelve payments
  3. The co-signer is liable only for interest, not principal
  4. The co-signer is fully liable if the primary borrower defaults Correct answer.

Explanation

A co-signer assumes joint liability for the entire debt, so the lender may pursue the co-signer if the primary borrower stops paying. The obligation typically lasts until the loan is paid in full or otherwise satisfied.

Question 14Credit and debt

Which practice by a creditor is prohibited under the Equal Credit Opportunity Act?

  1. Charging a higher rate to a borrower with a lower credit score
  2. Considering the applicant's existing debt obligations
  3. Denying credit based on the applicant's marital status Correct answer.
  4. Requiring documentation of income

Explanation

The Equal Credit Opportunity Act bars creditors from discriminating on protected characteristics such as marital status, sex, race, and receipt of public assistance. Creditors may still evaluate creditworthiness using legitimate financial factors.

Question 15Credit and debt

A borrower with a $500 balance and a 24 percent APR makes no payments for a full year. Approximately how much interest accrues if interest compounds monthly?

  1. About $240
  2. About $120 Correct answer.
  3. About $12
  4. About $60

Explanation

At 24 percent annual interest on $500, simple interest for a year is $120, and monthly compounding raises it only slightly above that. The figure is close to 24 percent of the principal rather than a multiple of it.

Question 16Credit and debt

Which factor would most likely cause a credit card issuer to impose a penalty APR?

  1. Making a payment more than 60 days late Correct answer.
  2. Disputing a charge under the billing-error process
  3. Paying the full balance before the due date
  4. Using less than 10 percent of the credit limit

Explanation

A payment that is sixty days or more past due commonly triggers a penalty APR under the terms of the card agreement. The higher rate generally applies to the existing balance and to new transactions until the account is brought current.

Question 17Credit and debt

A borrower wants to consolidate several high-rate credit card balances. Which feature most distinguishes a balance transfer offer from a consolidation loan?

  1. The transfer always eliminates the original debt without repayment
  2. The transfer moves debt onto a card, often with a promotional rate and a transfer fee Correct answer.
  3. The transfer converts unsecured debt into secured debt
  4. The transfer is available only to borrowers with no credit history

Explanation

A balance transfer shifts existing balances to a card, frequently at a low or zero introductory rate, in exchange for a fee of a few percent. A consolidation loan instead creates a new installment obligation used to pay off the old accounts.

Question 18Credit and debt

Which statement about the debt-to-income ratio in a mortgage application is accurate?

  1. It measures the loan amount as a percentage of the home's appraised value
  2. It measures the down payment as a share of closing costs
  3. It measures the borrower's credit score relative to the median
  4. It measures total monthly debt payments as a share of gross monthly income Correct answer.

Explanation

Debt-to-income ratio compares recurring monthly debt obligations to gross monthly income. Lenders use it to judge whether a borrower can absorb the proposed payment along with existing obligations.

Question 19Credit and debt

A consumer notices an unfamiliar account on a credit report. Which step best follows the dispute process for inaccurate information?

  1. Pay the balance to make the entry disappear
  2. Close all other accounts to limit exposure
  3. Write to the bureau and the furnisher with supporting documentation Correct answer.
  4. File for bankruptcy to clear the record

Explanation

Disputing inaccurate information requires notifying the credit bureau and often the furnisher directly, with documentation supporting the claim. The bureau must investigate and correct or delete information that cannot be verified.

Question 20Credit and debt

Which of the following best explains why a longer loan term can raise the total cost of borrowing even when the interest rate is lower?

  1. Longer terms reduce the principal balance immediately
  2. Interest accrues on the outstanding balance for more periods Correct answer.
  3. Longer terms eliminate the need for a down payment
  4. Longer terms always carry higher origination fees

Explanation

Extending the term spreads payments over more periods, and each period applies interest to the remaining balance. Even at a lower rate, the additional periods can increase total interest paid over the life of the loan.

Question 21Credit and debt

A consumer with a 30-day late payment and a maxed-out card applies for a new card. Which outcome is most consistent with typical underwriting?

  1. Approval with the best available rate because of the recent activity
  2. Denial or approval at a higher rate due to elevated risk Correct answer.
  3. Automatic approval because inquiries do not affect decisions
  4. Guaranteed approval under the Equal Credit Opportunity Act

Explanation

Recent delinquency and high utilization both signal elevated risk, so issuers commonly deny the application or price the credit higher. The Equal Credit Opportunity Act prohibits discrimination on protected grounds but does not guarantee approval.

Question 22Credit and debt

A borrower is comparing a 15-year mortgage at 5.5 percent with a 30-year mortgage at 6.0 percent on the same principal. Which analysis is most accurate?

  1. The 30-year loan has lower monthly payments and lower total interest
  2. The 15-year loan has lower monthly payments because the rate is lower
  3. The 15-year loan has higher monthly payments but lower total interest Correct answer.
  4. The two loans produce identical total interest because rates are close

Explanation

Shortening the amortization schedule raises the monthly principal-and-interest payment but sharply reduces the number of interest-bearing periods. As a result, the 15-year loan usually costs far less in total interest despite the higher payment.

Question 23Credit and debt

A consumer carries a $2,000 balance at 20 percent APR and is offered a balance transfer to a card with a 3 percent fee and 0 percent APR for fifteen months. Which factor most affects whether the transfer saves money?

  1. Whether the original card charges an annual fee
  2. Whether the new card offers rewards on groceries
  3. Whether the consumer's credit limit increases after the transfer
  4. Whether the balance is repaid before the promotional period ends Correct answer.

Explanation

The transfer costs $60 upfront in fees and saves interest only while the promotional rate lasts. If the balance remains after the promotional period, the standard rate on the new card can erase the savings.

Question 24Credit and debt

A borrower has three cards with limits of $2,000, $3,000, and $5,000 and balances of $1,500, $500, and $1,000. What is the overall credit utilization ratio?

  1. 20 percent
  2. 50 percent
  3. 30 percent Correct answer.
  4. 10 percent

Explanation

Total balances of $3,000 divided by total limits of $10,000 yields 30 percent utilization. Scoring models generally favor keeping aggregate utilization below about 30 percent and lower still for the best results.

Question 25Credit and debt

A debt collector calls a consumer at work after being told in writing to stop contacting the workplace. Which statement reflects the FDCPA?

  1. The collector may continue because workplace calls are always permitted
  2. The collector may call only if the employer consents
  3. The collector may call but must disguise the purpose of the call
  4. The collector must honor the request and cease contact at that location Correct answer.

Explanation

The FDCPA requires collectors to honor a consumer's request to stop contact at a particular location, including a workplace. Collectors may still communicate through other permitted channels or pursue legal action.

Question 26Credit and debt

Which credit reporting agency practice is specifically restricted by the Fair Credit Reporting Act?

  1. Declining to include accounts the consumer has closed
  2. Furnishing a consumer report to a party that lacks a permissible purpose Correct answer.
  3. Listing the same account twice under two different creditor names
  4. Reporting a bankruptcy that is more than ten years old

Explanation

The Fair Credit Reporting Act limits who may obtain a consumer report, and a party must have a permissible purpose such as a credit application, employment screening with consent, or insurance underwriting. Furnishing reports to parties without such a purpose violates the statute. The law also imposes accuracy duties, but the permissible-purpose rule is its core access restriction.

Question 27Credit and debt

A consumer's credit report shows a medical collection account that was paid in full two years ago. Which statement best describes how that item is typically treated in a credit score calculation?

  1. Paid collections are reported only to the original medical provider, not to bureaus
  2. Paid collections are removed immediately upon payment and never affect scoring
  3. Medical collections are excluded from all credit reports by federal law
  4. Paid collections may remain on the report for seven years and can still weigh on scores Correct answer.

Explanation

Paying a collection does not automatically delete the tradeline; the derogatory record generally stays for seven years from the date of first delinquency. Scoring models may treat paid collections more leniently than unpaid ones, but the item can still depress a score while it remains. Consumers should verify accuracy and the reported balance rather than assume payment erases the entry.

Question 28Credit and debt

A lender quotes an auto loan at 7 percent simple interest with a 60-month term. Which feature of the loan most affects how much total interest the borrower pays over that term?

  1. The timing of payments within each monthly billing cycle
  2. The size of the down payment relative to the vehicle price
  3. The principal balance on which the rate is applied Correct answer.
  4. The frequency with which the lender reports to the credit bureaus

Explanation

Interest is computed as rate multiplied by principal multiplied by time. With the rate and term fixed, the amount financed determines the dollar cost of borrowing. A larger down payment lowers principal, but the direct driver of interest charged is the outstanding balance.

Question 29Credit and debt

A consumer is deciding between a secured credit card and an unsecured card after a period of damaged credit. Which statement best describes the key structural difference relevant to that choice?

  1. A secured card requires a cash deposit that typically sets the credit limit Correct answer.
  2. A secured card reports to bureaus while an unsecured card does not
  3. An unsecured card cannot charge interest on carried balances
  4. A secured card cannot be used for everyday purchases

Explanation

A secured card is backed by a refundable deposit held by the issuer, and the deposit usually equals or approximates the credit limit. This reduces issuer risk and makes approval possible for consumers with thin or damaged credit. Both secured and unsecured cards generally report activity and can carry balances.

Question 30Credit and debt

A borrower has a credit card balance of $4,000 on a card with a $5,000 limit and a second card with a $10,000 limit and no balance. Which action would most improve the borrower's overall credit utilization?

  1. Closing the unused card to simplify the credit profile
  2. Requesting a credit limit increase on the card carrying the balance Correct answer.
  3. Making the minimum payment on the balance each month
  4. Transferring the balance to a new card and closing the original account

Explanation

Utilization compares total revolving balances to total revolving limits. Raising the limit on the card with the balance increases the denominator without adding debt, lowering the ratio. Closing accounts or shifting balances between cards can leave the aggregate ratio nearly unchanged or worse.

Question 31Credit and debt

A consumer receives a preapproved credit card offer stating that the interest rate may be a variable rate tied to the prime rate. Which statement best describes how that rate behaves?

  1. It changes only when the cardholder requests a new rate
  2. It converts automatically to a fixed rate after the first year
  3. It rises and falls with the referenced index, subject to disclosed terms Correct answer.
  4. It stays fixed for the life of the account once the card is issued

Explanation

A variable APR is calculated by adding a margin to an index such as the prime rate, so the rate adjusts when the index moves. Issuers must disclose the index, margin, and any rate cap in the account agreement. The rate is not permanently fixed, and it does not change only at the consumer's request.

Question 32Credit and debt

A borrower is deciding whether to use the avalanche or snowball method to repay three credit card debts. Which statement best captures the tradeoff between these two approaches?

  1. Avalanche targets the highest-rate balance first and usually saves more interest; snowball targets the smallest balance first for quicker psychological wins Correct answer.
  2. Snowball requires consolidating all debts into a single loan, while avalanche does not
  3. Avalanche targets the smallest balance first and always costs more in total interest than snowball
  4. Both methods produce identical interest savings because the total payment is the same

Explanation

The avalanche method directs extra payments to the debt with the highest interest rate, minimizing total interest paid. The snowball method pays off the smallest balance first, which can build momentum through early account closures. The right choice depends on whether the borrower values mathematical savings or behavioral reinforcement.

Question 33Credit and debt

A consumer signs a retail installment contract that includes an acceleration clause. Which statement best describes the effect of that clause?

  1. The lender must reduce the interest rate after a set number of on-time payments
  2. The borrower gains the right to return the merchandise for a full refund
  3. The consumer may skip payments without penalty during a hardship
  4. The entire remaining balance becomes due if the borrower defaults Correct answer.

Explanation

An acceleration clause allows the creditor to declare the full unpaid balance immediately due upon default, rather than waiting for each installment. This shifts risk to the borrower and often precedes repossession or collection. Consumers should review default definitions and cure rights before signing.

Question 34Credit and debt

A consumer wants to build credit history while avoiding revolving debt. Which approach best fits that goal?

  1. Taking out a payday loan and repaying it on the next payday
  2. Applying for several store cards at once to diversify accounts
  3. Carrying a small balance on a credit card to show usage
  4. Using a charge card and paying the full statement balance each month Correct answer.

Explanation

A charge card requires full payment of the statement balance each period, so it generates payment history without sustained revolving debt. Paying in full also avoids interest charges. This supports credit building while keeping utilization low.

Question 35Major purchases

A buyer is comparing two 30-year fixed-rate mortgages for the same loan amount. Lender A quotes 6.25% with 2 discount points; Lender B quotes 6.50% with no points. Which cost concept best explains why the lower-rate loan may not always be cheaper over the full term?

  1. The annual percentage rate, which folds points and fees into a single comparable cost figure Correct answer.
  2. The private mortgage insurance premium, which is required whenever a loan exceeds 80% LTV
  3. The escrow reserve requirement, which covers property taxes and hazard insurance
  4. The loan-to-value ratio, which measures the down payment against the purchase price

Explanation

The APR expresses the true cost of borrowing by incorporating discount points, origination fees, and other closing costs along with the interest rate, so it allows an apples-to-apples comparison. A borrower who pays points but sells or refinances early may not recoup the upfront cost, which is why the note rate alone can mislead.

Question 36Major purchases

Under the standard conventional loan guideline, private mortgage insurance is generally required when the down payment on a home purchase is less than what percentage of the purchase price?

  1. 20% Correct answer.
  2. 10%
  3. 30%
  4. 5%

Explanation

Conventional lenders typically require PMI when the loan-to-value ratio exceeds 80%, meaning the borrower put down less than 20%. PMI protects the lender against default, not the borrower, and it is commonly removable once equity reaches roughly 20%.

Question 37Major purchases

A borrower takes a 15-year fixed mortgage instead of a 30-year loan at the same interest rate. What is the primary financial trade-off of this choice?

  1. Elimination of the need for a down payment or escrow account
  2. Lower monthly payments in exchange for a shorter amortization period
  3. Higher monthly payments in exchange for substantially less total interest paid Correct answer.
  4. A lower interest rate guaranteed by federal lending rules

Explanation

Shortening the amortization schedule forces principal to be retired faster, so each monthly payment is larger but far less interest accrues over the life of the loan. The rate itself is set by the lender and market, not guaranteed lower by regulation.

Question 38Major purchases

A buyer is offered a mortgage with a teaser rate that resets after two years. Which document must disclose the potential payment increase and the maximum possible rate under federal truth-in-lending rules?

  1. The promissory note alone
  2. The property appraisal report
  3. The Loan Estimate and the Closing Disclosure Correct answer.
  4. The Closing Disclosure only

Explanation

For adjustable-rate mortgages, the Loan Estimate and the Closing Disclosure must show the initial rate, the scheduled first adjustment, and a worst-case example of the maximum rate and payment. These disclosures let the borrower compare the risk before committing.

Question 39Major purchases

A lender quotes a 6% annual rate compounded monthly on a car loan. Which figure correctly represents the effective annual rate (EAR) the borrower actually pays?

  1. 6.00%
  2. 6.50%
  3. 6.17% Correct answer.
  4. 7.44%

Explanation

The effective annual rate accounts for intra-year compounding using EAR = (1 + r/n)^n - 1. With a 6% nominal rate compounded monthly, (1 + 0.005)^12 - 1 equals approximately 6.17%.

Question 40Major purchases

A buyer is considering a vehicle lease rather than a purchase. Which statement accurately describes a typical closed-end lease?

  1. The lessee owns the vehicle at the end of the term without further payment
  2. The lessee may be charged nothing for excess mileage beyond the contract limit
  3. The lessee's monthly payment includes full repayment of the vehicle's purchase price
  4. The lessee returns the vehicle or buys it at a residual value set in the contract Correct answer.

Explanation

In a closed-end lease the lessor retains the residual risk, and at term end the lessee either returns the car or purchases it at the pre-set residual value. Monthly lease payments cover depreciation during the term plus rent charges, not the entire vehicle price.

Question 41Major purchases

A consumer signs a car loan for $24,000 at 7% annual interest for 60 months. Which factor most increases the total finance charge if all other terms stay the same?

  1. Refinancing to a 5% rate for the remaining balance
  2. Extending the term to 72 months at the same rate Correct answer.
  3. Increasing the monthly payment amount voluntarily
  4. Making a larger down payment at signing

Explanation

Lengthening the repayment period keeps the balance outstanding longer, so more interest accrues even though the monthly payment falls. Larger down payments, lower rates, and extra principal payments all reduce total interest.

Question 42Major purchases

When pricing a new car, the difference between the manufacturer's suggested retail price and the dealer's actual cost to acquire the vehicle is best described as which of the following?

  1. The documentary fee charged by the dealer for paperwork
  2. The destination charge required by federal law
  3. The negative equity rolled from a prior trade-in
  4. The holdback and dealer margin built into the sticker price Correct answer.

Explanation

Dealer margin, including factory holdback, represents the spread between what the dealer pays and the sticker price, and it is the space within which negotiation occurs. Destination charges and doc fees are separate line items, not the same as margin.

Question 43Major purchases

A borrower wants to compare the total cost of two auto financing offers. Which calculation gives the most complete comparison?

  1. Sum of all monthly payments plus down payment and fees, minus the vehicle's resale value Correct answer.
  2. The quoted annual percentage rate alone
  3. The length of the loan term alone
  4. The monthly payment amount alone

Explanation

Total cost of ownership for a financed vehicle includes all payments, the down payment, fees, and the eventual resale or trade-in value. Comparing only the APR, payment, or term omits parts of the cash flow and can favor the wrong offer.

Question 44Major purchases

A tenant signs a one-year apartment lease that requires first month's rent, last month's rent, and a security deposit equal to one month. Which statement about the security deposit is generally accurate?

  1. The landlord may keep it for normal wear and tear
  2. It automatically converts to the final month's rent at the tenant's discretion
  3. It is forfeited if the tenant gives proper notice to vacate
  4. It must be returned with an itemized statement of any deductions, subject to state rules Correct answer.

Explanation

Security deposits are refundable and landlords must generally provide an itemized accounting of deductions within a state-specified period. Normal wear and tear cannot be charged against the deposit, and tenants cannot unilaterally apply it to rent.

Question 45Major purchases

A prospective renter is comparing two apartments with identical rent. Which lease term most deserves scrutiny because it shifts significant cost or risk to the tenant?

  1. A clause requiring the tenant to carry renter's insurance
  2. A clause specifying a 30-day notice period to renew
  3. A clause listing the landlord's entry notice requirement
  4. A clause making the tenant responsible for all repairs regardless of cause Correct answer.

Explanation

Shifting all repair obligations to the tenant, even for structural or systems failures, is an unusual and costly allocation of risk that tenants should negotiate or reject. Standard clauses on insurance, notice, and entry are routine and balanced.

Question 46Major purchases

A homeowner is deciding between a fixed-rate and an adjustable-rate mortgage. Which circumstance most favors choosing the adjustable-rate product?

  1. The borrower expects to sell or refinance within the initial fixed-rate period Correct answer.
  2. The borrower expects market interest rates to rise sharply
  3. The borrower plans to stay in the home for 30 years on a tight budget
  4. The borrower wants certainty about the maximum monthly payment

Explanation

An ARM usually starts below fixed rates, so a borrower who exits before the first reset captures the savings without bearing adjustment risk. Long tenure, payment certainty, and rising-rate expectations all favor a fixed-rate loan.

Question 47Major purchases

A buyer is told the lender will escrow property taxes and homeowners insurance. What does this arrangement mean for the monthly payment?

  1. The payment covers only principal and interest, with taxes billed separately
  2. The payment includes one-twelfth of annual taxes and insurance in addition to principal and interest Correct answer.
  3. The payment includes PMI only when the loan is above 80% LTV
  4. The payment is reduced because escrow eliminates the need for insurance

Explanation

An escrow account collects a portion of annual tax and insurance bills each month, so the total payment (often called PITI) exceeds principal and interest alone. The servicer then disburses those funds when bills come due.

Question 48Major purchases

A first-time buyer has a stable income but a modest down payment and limited savings for emergencies. Which action best balances homeownership goals with financial safety?

  1. Draining savings to reach a 20% down payment and avoid PMI
  2. Keeping a cash reserve while accepting PMI on a smaller down payment Correct answer.
  3. Choosing the shortest loan term available regardless of payment size
  4. Buying at the maximum loan amount the lender pre-approves

Explanation

Preserving an emergency fund protects against unexpected repairs and income shocks that are common after a purchase. Avoiding PMI at the cost of zero reserves leaves the homeowner exposed to the first major expense.

Question 49Major purchases

A seller agrees to pay some of the buyer's closing costs in exchange for a higher purchase price. What is this arrangement commonly called?

  1. An assumable mortgage
  2. A short sale
  3. A rate lock
  4. A seller concession Correct answer.

Explanation

A seller concession lets the buyer finance certain closing costs through a higher price, subject to lender limits. It can help a cash-constrained buyer but raises the loan balance and interest paid over time.

Question 50Major purchases

A homeowner with a $200,000 balance at 6% refinances to 4.5% but pays $6,000 in closing costs. Approximately how should the homeowner evaluate whether the refinance is worthwhile?

  1. Refinance only if the new term is shorter than the old term
  2. Refinance only if the home has appreciated since purchase
  3. Refinance only if the new rate is at least three points lower
  4. Compare the monthly interest savings against the closing costs to find the break-even month Correct answer.

Explanation

The break-even analysis divides closing costs by the monthly payment savings to determine how many months are needed to recover the upfront expense. If the homeowner plans to stay beyond that point, refinancing creates net savings.