California Mortgage Licensing Practice Exam 2025 – Complete Test Prep

The concept of lock and float in mortgage terms pertains primarily to managing interest rate risk. When a borrower locks in an interest rate, they ensure that the rate remains unchanged for a specified period, regardless of fluctuations in the market. This provides the borrower protection from rising rates, which could result in higher monthly payments or a more expensive loan if they had chosen to float their interest rate, waiting for potential decreases.

Floating the interest rate means that the borrower allows the rate to adjust according to market conditions. While this could result in a lower rate if the market declines, it also poses the risk of an increase in rates, which can negatively impact the overall cost of the mortgage. By having the option to lock or float, borrowers strategically manage their exposure to interest rate variability based on their financial situation and market predictions.

The other options relate to different aspects of the mortgage process. Determining loan eligibility involves evaluating borrower qualifications based on income, credit history, etc. Calculating loan-to-value ratios is crucial for determining how much equity a borrower has in their property in relation to the mortgage amount. Assessing property value is essential for knowing the market worth of the property in question. However, none of these functions directly relate to the management of interest rate risk, which