Question 1

A reverse mortgage can be a good option for first-time homebuyers who cannot make a substantial down payment.

Accepted Answer

A reverse mortgage is not an option for first-time homebuyers who have not yet built up equity in their home. It is typically used by older homeowners who have significant equity in their home and want to access that equity for retirement expenses or other purposes.

Question 2

Borrowers with fixed rate mortgages generally benefit if actual inflation is higher than expected inflation.

Accepted Answer

Borrowers with fixed rate mortgages have a set interest rate that does not change throughout the life of the loan. If actual inflation turns out to be higher than expected, it will erode the purchasing power of the lender's returns, making the fixed rate less expensive in real terms. Thus, the borrower would effectively pay back the loan with dollars that are worth less due to inflation. This outcome generally benefits the borrower, especially if they were expecting lower inflation when they took out the loan.

Question 3

Truth-in-lending requires the borrower to tell the truth on the loan application.

Accepted Answer

Truth-in-lending is a law that requires lenders to disclose accurate and clear information about the terms and costs of a loan to the borrower. It does not directly require the borrower to tell the truth on the loan application, although providing false information on the application can have legal consequences.

Question 4

A borrower obtains a $150,000 reverse mortgage with monthly payments over 10 years.If the interest rate of the mortgage loan is 8%,what is the monthly payment received by the borrower?

Accepted Answer

The answer of A borrower obtains a $150,000 reverse mortgage...

Question 5

A borrower has a 30-year mortgage loan for $200,000 with an interest rate of 6% and monthly payments.If she wants to pay off the loan after 8 years,what would be the outstanding balance on the loan?

Accepted Answer

The answer of A borrower has a 30-year mortgage loan...

Question 6

The effective interest rate on a mortgage will always be higher than the stated rate of the loan.

Accepted Answer

The effective interest rate can be higher, equal to, or lower than the stated rate depending on factors like compounding frequency and additional fees.

Question 7

Origination fees are tax deductible as an interest expense.

Accepted Answer

Origination fees on a personal mortgage can be deducted as mortgage interest if they are charged for the use of the money, not for services like preparation costs, but they are not generally deductible as a separate interest expense category.

Question 8

One difference between the constant amortizing mortgage (CAM)and the constant payment mortgage (CPM)is the interest paid and loan amortization relationship.With a CAM,the loan amortization and interest paid are directly related and with the CPM the loan amortization and the interest paid are inversely related.

Accepted Answer

In a CAM, as the principal amount decreases, both the interest payment and the amortization amount decrease over time, maintaining a direct relationship. In a CPM, as more of the loan gets paid off, the portion of the payment going towards interest decreases while the portion going towards principal increases, showing an inverse relationship between interest paid and loan amortization.

Question 9

Prepayment penalties increase the lender's mortgage yield and discount points decrease it.

Accepted Answer

Prepayment penalties increase the lender's yield by compensating for the loss of future interest income when a loan is paid off early, while discount points are upfront fees paid to lower the interest rate, effectively increasing the lender's yield by receiving money upfront.

Question 10

A borrower takes out a 30-year mortgage loan for $250,000 with an interest rate of 5%.What would the monthly payment be?

Accepted Answer

The monthly payment for a 30-year mortgage of $250,000 at an interest rate of 5% can be calculated using the formula for a fixed-rate mortgage. The correct monthly payment is approximately $1,342.

Question 11

A borrower takes out a 30-year mortgage loan for $100,000 with an interest rate of 6% plus 4 points.What is the effective annual interest rate on the loan if the loan is carried for all 30 years?

Accepted Answer

The borrower pays 4 points, or 4% of the loan amount, upfront as a closing cost. Therefore, the actual amount received by the borrower is $100,000 - $4,000 = $96,000. The annual interest on the loan is 6%. However, because of the points, the effective annual interest rate is higher. To calculate the effective annual interest rate over the 30-year period, we can use the following formula:

Effective Annual Interest Rate = (1 + (Annual Interest Rate - Points)) ^ (Number of Years in Loan) - 1

Plugging in the values:

Effective Annual Interest Rate = (1 + (0.06 - 0.04))^30 - 1 = 0.064, or 6.4%

Therefore, the best choice is C, with an effective annual interest rate of 6.4%.

Question 12

Graduated payment mortgage are loans available to people who have graduated from college.

Accepted Answer

Graduated payment mortgage is a type of home loan where the monthly payments begin low and increase gradually over time. It is not specific to college graduates, but rather based on a repayment structure.

Question 13

A borrower takes out a 30-year mortgage loan for $250,000 with an interest rate of 5% and monthly payments.What portion of the first month's payment would be applied to interest?

Accepted Answer

To calculate the portion of the first month's payment that is applied to interest, we need to find what the monthly interest rate is. We can do this by dividing the annual interest rate by 12:

5% / 12 = 0.00416667

Next, we can use the loan balance ($250,000) and the monthly interest rate (0.00416667) to calculate the interest portion of the first month's payment:

Interest = Loan balance x Monthly interest rate 
Interest = $250,000 x 0.00416667 
Interest = $1,041.67

Therefore, the answer is choice B, $1,042.

Question 14

Determining a loan balance on a CPM is a simple present value of an annuity problem.

Accepted Answer

Determining a loan balance on a CPM involves calculating the present value of the remaining payments on the loan using the concept of an annuity. Therefore, it is a present value of an annuity problem.

Question 15

Inflation makes very little difference to lenders of and investors needing money.

Accepted Answer

Inflation does make a difference to lenders and investors needing money. Inflation reduces the purchasing power of money over time, meaning that lenders receive less valuable money back in the future when they loan it out, and investors receive lower real returns on their investments. Therefore, inflation is an important consideration for lenders and investors in their decision-making.

Question 16

With a negative amortizing loan,the borrower will end up with a loan balance at the end of the loan that is greater than the original loan balance.

Accepted Answer

A negative amortizing loan allows the borrower to make lower payments in the initial years, resulting in unpaid interest that is added to the principal balance. As a result, the borrower ends up with a higher loan balance at the end of the loan than the original loan balance.

Question 17

The annual percentage rate closely approximates the borrower's true cost of funds.

Accepted Answer

The answer of The annual percentage rate closely approximates the...

Question 18

With a reverse mortgage the borrower receives payments from the bank.

Accepted Answer

With a reverse mortgage, the bank makes payments to the borrower based on the equity in their home. The borrower does not make payments to the bank.

Question 19

Lenders and investors worry about default,interest rate,marketability,and liquidity risks.

Accepted Answer

Lenders and investors are concerned about risks that may result in default, interest rate fluctuations, inability to sell assets easily (marketability risk), and inability to trade assets quickly without significant loss (liquidity risk).

Question 20

The APR for a loan assumes it is prepaid after ten years.

Accepted Answer

The APR for a loan does not assume any specific prepaid period. It is simply the annual rate charged for borrowing money, including fees and other charges.

Quiz 4: Fixed Interest Rate Mortgage Loans