Mortgage & Home Loan Basics
Real Estate
✓ 10 multiple-choice questions
✓ 15 seconds per question
✓ Earn up to 150 coins
✓ Explanations provided for each answer
About This Quiz
For most people, a mortgage is the largest financial commitment they will ever make — typically lasting 15 to 30 years and involving hundreds of thousands of dollars. Yet a 2022 survey by the National Foundation for Credit Counseling found that fewer than half of homebuyers fully understood their mortgage terms before signing. This quiz covers the essential mortgage knowledge that every homebuyer should have before sitting at a closing table. You'll be tested on the difference between fixed-rate and adjustable-rate mortgages, how mortgage interest rates are determined, what points are and when buying them down makes sense, the distinction between pre-qualification and pre-approval, how lenders calculate your debt-to-income ratio, the true cost of private mortgage insurance (PMI), and when refinancing makes financial sense. You'll also learn about government-backed loan programs like FHA, VA, and USDA loans that offer advantages for eligible buyers. Every question is accompanied by a detailed explanation to build your practical understanding — because signing a mortgage without understanding it can cost you thousands of dollars in avoidable costs.
Disclaimer: This content is for educational purposes only. Consult a qualified professional for advice specific to your situation.
Key Concepts You'll Be Tested On
Fixed-Rate Mortgage
A mortgage with an interest rate that never changes for the life of the loan. Monthly principal and interest payments remain constant, providing payment certainty over 15 or 30 years.
Adjustable-Rate Mortgage (ARM)
A mortgage with an initial fixed rate that adjusts periodically based on a market index. A 5/1 ARM has a fixed rate for 5 years, then adjusts annually — lower initial rate, higher risk.
APR vs. Interest Rate
The interest rate is the base borrowing cost; APR (Annual Percentage Rate) includes the interest rate plus fees (origination, points, mortgage insurance), representing the true annual cost of the loan.
Debt-to-Income Ratio (DTI)
Your monthly debt payments divided by gross monthly income. Most conventional lenders require a DTI below 43%, with better rates available at 36% or below.
Private Mortgage Insurance (PMI)
Insurance required by lenders when a buyer puts less than 20% down on a conventional loan. PMI protects the lender, not you, and typically costs 0.5%-1.5% of the loan amount annually.
Points
Upfront fees paid to the lender at closing to reduce the interest rate. One point equals 1% of the loan amount. Buying points makes sense if you plan to stay in the home long enough to recoup the upfront cost.
Did You Know?
The 30-year fixed mortgage — the most common mortgage in the US — is relatively unique globally. Most other countries use shorter terms or variable-rate mortgages. The 30-year fixed became standard partly because of government backing through Fannie Mae.
On a $400,000 mortgage at 7% vs 6% interest rate, the difference in monthly payment is approximately $265 — and over 30 years, you'd pay approximately $95,400 more at the higher rate.
The FHA (Federal Housing Administration) loan program, established in 1934 during the Great Depression, has helped over 47 million Americans achieve homeownership by allowing down payments as low as 3.5%.
The word 'mortgage' comes from Old French — 'mort' meaning 'dead' and 'gage' meaning 'pledge'. The 'death pledge' referred to either the pledge dying when the debt is paid or the property being lost (dying) if payment fails.
Frequently Asked Questions
How much do I need for a down payment?+
The minimum down payment varies by loan type. Conventional loans require as little as 3% (for first-time buyers) though you'll pay PMI until you reach 20% equity. FHA loans require 3.5% if your credit score is 580+ or 10% if it's 500-579. VA loans (for eligible veterans and military) and USDA loans (for eligible rural properties) typically require zero down payment. The traditional 20% down payment eliminates PMI and reduces your monthly payment, but it's not required. Median down payments among first-time buyers have ranged from 6-8% in recent years according to NAR data.
What credit score do I need to get a mortgage?+
Minimum requirements vary by loan type. Conventional loans typically require a 620+ credit score (though better rates require 740+). FHA loans can go as low as 500 (with 10% down) or 580 (with 3.5% down). VA loans have no set minimum but most lenders look for 620+. The higher your score, the lower your interest rate — the difference between a 620 and 760 score on a $300,000 mortgage can translate to more than $100 per month in payment difference, or over $36,000 over a 30-year loan. If your score needs improvement, spending 6-12 months before applying to pay down balances and catch up on late payments can significantly improve your rate.
What are closing costs and how much should I expect?+
Closing costs are fees paid at the mortgage closing, typically ranging from 2% to 5% of the loan amount. They include: lender origination fees, appraisal fee ($400-800), title search and insurance ($1,000-2,500), attorney fees in some states, recording fees, prepaid property taxes and insurance, and possibly discount points. On a $300,000 loan, expect $6,000-$15,000 in closing costs. You'll receive a Loan Estimate within 3 business days of applying, detailing all projected costs. Some closing costs are negotiable; others are not. Some lenders offer 'no-closing-cost' mortgages that roll costs into the interest rate.
When does refinancing make sense?+
Refinancing makes financial sense when the rate reduction saves more over your planned time in the home than the cost of refinancing. A general rule: if you can reduce your rate by at least 0.75%-1% and plan to stay long enough to break even on closing costs (typically 2-5 years), refinancing is worth considering. Calculate the break-even point by dividing closing costs by your monthly savings. Refinancing also makes sense to switch from an ARM to a fixed rate for stability, to remove PMI once you've reached 20% equity (through a new appraisal), or to change loan terms. Cash-out refinancing to access home equity should be approached carefully as it increases your debt and resets your repayment clock.