Question 1

You currently have an ARM that is charging you 7% with an index rate of 4%, a margin of 3%, and a periodic annual cap of 3.0%. Assume that rates have now increased by 2% during the last seven months. What rate will your ARM be adjusted to?

Accepted Answer

The adjusted rate of an ARM is determined by adding the index rate to the margin. The periodic annual cap limits the amount that the rate can increase or decrease in any given year.

Currently, the ARM's rate is 7%, which is the sum of the index rate of 4% and the margin of 3%.

Since rates have increased by 2%, the new index rate will be 6% (4% + 2%).

The maximum amount that the rate can increase during any given year is 3%. Therefore, the maximum possible rate after adjustment will be:

6% (new index rate) + 3% (margin) + 3% (periodic annual cap) = 12%

However, since the ARM is currently at a rate of 7%, the rate cannot increase by more than 5% in any given year (3% maximum annual cap + 2% increase in interest rates).

Therefore, the new adjusted rate of the ARM will be:

7% (current rate) + 5% (maximum rate increase) = 12%

Thus, the answer is C) 9%.

Question 2

Hector a Maria have been married for almost one year now and are thinking about buying a house. Maria is an executive for a large, multi-national corporation with offices around the world. She has been told by her company that she will be transferred to a new location every three years. Hector is a car salesman and he is willing to move to wherever Maria gets transferred. Together they make $8,000 in gross monthly income and pay 40% in taxes and withholdings every month. Between them they have monthly payment of $400 in student loans and $700 in car loans, and their credit cards payments average $450 per month. They currently lease a luxury condo for $1,400 per month. They travel to Cancun every Christmas. Since they both work a lot of hours, they eat out at restaurants for most meals. They currently have nothing in savings but Hector's grandparents have said they will give them a 20% downpayment for the new home.
-They saw in the newspaper that they can get a fixed rate mortgage for 6.65% or a two-year ARM with an initial rate of 5.50%. Which is true about their mortgage choices?

Accepted Answer

The ARM's initial rate is lower than the fixed rate, which means the initial payments will be lower, making it an attractive short-term option. Maria's job situation could make the ARM more suitable if it implies potential for increased income or mobility, although specific details about Maria's job are not provided, the suggestion is that her job situation could influence the choice favorably towards an ARM.

Question 3

Salvadore Dobraseri is a military veteran and has been told by a friend to check out a VA or FHA loan for the purchase of the home he and his wife are interested in. Why should he?

Accepted Answer

VA (Veterans Affairs) and FHA (Federal Housing Administration) loans offer benefits to military veterans and others with less than perfect credit or less money saved for a down payment. These benefits include lower interest rates (A), smaller down payment requirements (B), and less strict financial requirements (C). Although veterans are not required to obtain these types of mortgages, they may be a good choice for those who qualify. Therefore, the best choice is E, as it includes all of the above benefits for eligible borrowers.

Question 4

Rhonda is buying a 2nd home to use as income property. She is financing 75% of the home's $100,000 value. Her bank is loaning her the money for 10 years at an APR of 4.5%. How much are Rhonda's mortgage payments?

Accepted Answer

The answer of Rhonda is buying a 2nd home to...

Question 5

Jessica is buying her first new home. The home has been appraised at $330,000. For Jessica to NOT have to pay private mortgage insurance she must come up with a downpayment of ________.

Accepted Answer

To avoid private mortgage insurance, a typical requirement is a 20% down payment. 20% of $330,000 is $66,000.

Question 6

You have an option on an ARM that has a two-year adjustment interval, 4% margin, 2% periodic rate cap and a 6% lifetime cap. The current initial rate is 5.35%. You can also get a 30-year, fixed-rate mortgage for 6.65%. You plan on staying in this home for at least 10 years. What would be your best choice?

Accepted Answer

The best choice would be the fixed-rate loan because you plan on staying in the home for at least 10 years, meaning that you would have multiple adjustments during that time with the ARM, resulting in a higher potential interest rate. The fixed-rate loan will allow for easier budgeting and less risk in the long term. The difference in initial PITI between the two options is not significant enough to outweigh the potential risks of an ARM in this scenario.

Question 7

A ________ mortgage is designed to let the homeowner pay off the mortgage early. Payments begin at the 30-year fixed rate, then increase each year.

Accepted Answer

The answer of A ________ mortgage is designed to let...

Question 8

The two primary advantages of a 15-year mortgage over a 30-year mortgage are

Accepted Answer

The two primary advantages of a 15-year mortgage over a 30-year mortgage are the lower interest rate and lesser interest charges over the life of the loan. This means that the borrower can save a significant amount of money in interest payments over the loan's term. However, the downside is that the monthly payments will be higher than those of a 30-year mortgage.

Question 9

The ________ mortgage sets the payments in advance in such a way that they rise steadily for 5 to 10 years, then level off to allow a person to buy a home earlier in life.

Accepted Answer

The graduated payment mortgage is designed to offer lower monthly payments in the beginning years of the mortgage, which then increase in a pre-determined increment for a set period of time (usually 5-10 years) before leveling off. This allows individuals to purchase a home earlier in life when their income may be lower, with the confidence that their income will grow over time and they will be better equipped to handle higher mortgage payments in the future.

Question 10

A ________ is a middleman who, for a fee, secures mortgage loans for borrowers, but does not actually make those mortgage loans.

Accepted Answer

A mortgage broker acts as a middleman between the borrower and the lender, helping the borrower secure a mortgage loan for a fee. They do not actually make the mortgage loan themselves, unlike a mortgage banker. The mortgagee is the lender who provides the loan, and the mortgagor is the borrower who receives the loan.

Question 11

The advantages of a fixed-rate mortgage over an ARM include

Accepted Answer

A fixed-rate mortgage provides consistent payments that are easier to budget for, unlike an adjustable-rate mortgage (ARM). Additionally, there is less worry about the loan reaching rate and payment caps with a fixed-rate mortgage. Private mortgage insurance (PMI) is required when the down payment is less than 20% for both types of mortgages, so it is not an advantage exclusive to fixed-rate mortgages.

Question 12

Hector a Maria have been married for almost one year now and are thinking about buying a house. Maria is an executive for a large, multi-national corporation with offices around the world. She has been told by her company that she will be transferred to a new location every three years. Hector is a car salesman and he is willing to move to wherever Maria gets transferred. Together they make $8,000 in gross monthly income and pay 40% in taxes and withholdings every month. Between them they have monthly payment of $400 in student loans and $700 in car loans, and their credit cards payments average $450 per month. They currently lease a luxury condo for $1,400 per month. They travel to Cancun every Christmas. Since they both work a lot of hours, they eat out at restaurants for most meals. They currently have nothing in savings but Hector's grandparents have said they will give them a 20% downpayment for the new home.
-Based on their incomes, how large of a PITI can they comfortably afford to pay?

Accepted Answer

The answer of Hector a Maria have been married for...

Question 13

Daniel is due to receive the balance of his trust fund in 5 years; as a result he has taken out a ________ mortgage where he has made small payments for several years and will pay off the balance in one large payment with his trust funds.

Accepted Answer

The type of mortgage described in the scenario is a balloon payment mortgage. This is because the borrower makes small payments over a certain period of time and then makes one large payment (balloon payment) to pay off the remaining balance. The other options, such as ARM, graduated payment, shared appreciation, and fixed rate mortgages, do not fit the scenario described.

Question 14

Ben recently paid off his school loans and is looking to buy a home. He has qualified for an APR of 5.2% and plans on making payments for the next 15 years. He anticipates he can afford a monthly payment of $660.00. How much of a mortgage can Ben afford?

Accepted Answer

To determine how much of a mortgage Ben can afford, we use the formula for calculating the present value of an annuity, which is what a mortgage essentially is. The formula is: $P = PMT \times \left(\frac{1 - (1 + r)^{-n}}{r}\right)$, where $P$ is the present value (or the amount of the mortgage), $PMT$ is the monthly payment, $r$ is the monthly interest rate, and $n$ is the total number of payments.Given:- APR (annual percentage rate) = 5.2% or 0.052 as a decimal.- Monthly interest rate $r = \frac{0.052}{12}$.- Monthly payment $PMT = $660$.- Total number of payments over 15 years $n = 15 \times 12$.Plugging these values into the formula:$P = 660 \times \left(\frac{1 - (1 + \frac{0.052}{12})^{-15 \times 12}}{\frac{0.052}{12}}\right)$Calculating this gives a value around $82,371, which means Ben can afford a mortgage close to this amount.

Question 15

Your mortgage is an ARM with a 1 year adjustment interval, 4% margin, and a 2% periodic cap. Your initial APR on this loan was 4.5%. Over the last 5 years the market rates of interest have risen dramatically. The current interest rate index for your loan is 8.5 %. What APR are your monthly payments being calculated on today?

Accepted Answer

The periodic cap for this loan is 2%, which means that the interest rate can only increase by 2% each year. Over the last 5 years, the interest rate index has risen from the initial 4.5% to 8.5%, which is a total increase of 4%.

Since the 2% periodic cap has already been reached, the interest rate on the loan will increase to the maximum allowed by the cap, which is 2% above the current index rate. Therefore, the new APR on this loan would be:

8.5% (current index rate) + 4% (margin) + 2% (maximum periodic cap) = 14.5%

Therefore, monthly payments will be calculated on an APR of 14.5%, which is choice D.

Question 16

Thomas took a new job in Iowa. He is buying his first home. He has qualified for an APR of 4.6%. He plans on making payments for the next 20 years. He anticipates that he can afford a payment of $550.00. How much of a mortgage will Thomas qualify for?

Accepted Answer

To calculate the mortgage amount, we can use the formula: 
Mortgage amount = Payment / ( APR * (1- (1+APR)^-n) )
where APR is the monthly interest rate, n is the total number of payments (in months), and Payment is the amount Thomas can afford each month.
Plugging in the given values, we get: 
Mortgage amount = $550 / (0.00383 * (1- (1+0.00383)^-240) )
Mortgage amount = $86,199. Therefore, Choice C is the correct answer.

Question 17

Your ARM has a two year adjustment interval, 4% margin, 2% periodic rate cap and a 6% lifetime cap. This year the market interest index increased by 2.75%. What will happen to your APR on this loan?

Accepted Answer

The APR will increase by 2% due to the 2% periodic rate cap, which limits how much the interest rate can increase in a single adjustment period, despite the market interest index increasing by 2.75%.

Question 18

A(n) ________ ARM combines the aspects of fixed-rate and adjustable-rate mortgages.

Accepted Answer

A two-step ARM combines the features of both fixed-rate and adjustable-rate mortgages. The interest rate is fixed for the initial period of the loan and then adjusts to market conditions for the remainder of the loan term. This allows borrowers to take advantage of the lower initial rates of an ARM while providing the security of a fixed-rate mortgage during the first few years of homeownership.

Question 19

A ________ typically originates mortgage loans with funds from other investors, such as pension funds.

Accepted Answer

A mortgage banker typically originates mortgage loans by using funds from other investors, such as pension funds. Mortgage brokers typically act as middlemen between borrowers and lenders, while mortgagees are the lenders who provide the mortgage loan to the borrower. The mortgagor is the borrower who pledges their property as collateral for the loan. Therefore, the best choice for the given question is A) mortgage banker.

Question 20

With a(n) ________ mortgage, you make relatively small monthly payments for several years, after which the loan comes due and you must pay it off in one large payment.

Accepted Answer

A balloon payment mortgage is the only option listed that matches the description given, where small monthly payments are made for a set period of time and then a large final payment is required to pay off the remaining balance. The other options listed (growing equity, option payment ARM, interest only) do not have a requirement for a large final payment.

Quiz 8: The Home and Automobile Decision