Question 1

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

Accepted Answer

Borrowers with fixed rate mortgages lock in a set interest rate, which means that if actual inflation is higher than the inflation rate that was expected when the mortgage was taken out, they will be paying back their loan with cheaper dollars, which is advantageous for them.

Question 2

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

Accepted Answer

Truth-in-lending requires lenders to disclose certain loan terms and costs in a standard format to borrowers. It does not place requirements on the borrower's honesty on the loan application. However, providing false information on a loan application is illegal and can result in severe consequences.

Question 3

Which of the following is NOT a determinant of interest rates for single family residential mortgages?&#10;A)The demand and supply of mortgage funds&#10;B)Inflation expectations&#10;C)Liquidity&#10;D)The demand and supply of apartments

Accepted Answer

The demand and supply of apartments is not a determinant of interest rates for single family residential mortgages, as it is not directly related to the market for these types of mortgages. The other options listed are commonly cited determinants of interest rates for single family residential mortgages.

Question 4

Risk is an important component of interest rates.Which of the following risks is NOT a determinant of interest rates?&#10;A)Default risks&#10;B)Interest rate risks&#10;C)Institutional risks&#10;D)Marketability risks

Accepted Answer

Institutional risks are not a direct determinant of interest rates. Interest rates are primarily influenced by default risks (the risk that the borrower will not make the required payments), interest rate risks (the risk of interest rates changing unfavorably), and marketability risks (the risk associated with the ease of selling the investment). Institutional risks, which pertain to the specific practices and stability of financial institutions, do not directly affect the general determination of interest rates.

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?&#10;A)$84,886&#10;B)$91,246&#10;C)$146,667&#10;D)$175,545&#10;E)Not enough information

Accepted Answer

After 8 years, the borrower would have made 8 x 12 = <<8*12=96>>96 monthly payments. Using the formula for calculating the outstanding balance on a mortgage loan, we get: Outstanding balance = P*[r(1+r)^n]/[(1+r)^n-1] * [(1+r)^N - 1] where P is the principal, r is the monthly interest rate, n is the number of payments per year, and N is the total number of payments. Plugging in the values, we get: Outstanding balance = 200,000*[0.06/12*(1+0.06/12)^12]/[(1+0.06/12)^12-1] * [(1+0.06/12)^96 - 1] = $175,545. Therefore, the answer is D.

Question 6

The annual percentage rate,disclosed at the loan closing,closely approximates the borrower's true cost of funds

Accepted Answer

The answer of The annual percentage rate,disclosed at the loan...

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

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?&#10;A)$694&#10;B)$1,042&#10;C)$1,342&#10;D)$1,355&#10;E)Not enough information

Accepted Answer

To calculate the portion of the first month's payment applied to interest, we need to use the formula: 
Interest for first month = (Outstanding loan balance x monthly interest rate)
The monthly interest rate is calculated by dividing the annual interest rate by 12, so in this case it is (5%/12) = 0.004167.

To find the outstanding loan balance, we need to use the amortization formula:
Outstanding loan balance = P*(1+r)^n -[(1+r)^n - 1]/r * C
where P is the loan amount, r is the monthly interest rate, n is the number of payments (30 years = 360 months), and C is the monthly payment.

Plugging in the numbers, we get:
Outstanding loan balance = $250,000*(1+0.004167)^360 - [(1+0.004167)^360 - 1]/0.004167 * $1,342
Outstanding loan balance = $250,000*(1.004167)^360 - [(1.004167)^360 - 1]/0.004167 * $1,342
Outstanding loan balance = $250,000*(4.38713) - [4.38713 - 1]/0.004167 * $1,342
Outstanding loan balance = $1,097.81 - 2,430.19
Outstanding loan balance = $248,569.81

So the interest for the first month is: 
Interest for first month = $248,569.81 * 0.004167
Interest for first month = $1,034.72

Therefore, the portion of the first month's payment that is applied to interest is $1,042.

Question 9

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

Accepted Answer

Lenders and investors are concerned about default risk, which is the risk that the borrower will not repay the loan, interest rate risk, which refers to the risk of changes in interest rates affecting the value of the investment, marketability risk, which is the risk that the investment cannot be easily sold or traded, and liquidity risk, which is the risk that the investor cannot easily convert their investment into cash.

Question 10

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?&#10;A)5.6%&#10;B)6.0%&#10;C)6.4%&#10;D)6.6%

Accepted Answer

To find the effective annual interest rate, we need to take into account the interest rate and the points paid upfront.

One point is equal to 1% of the loan amount. In this case, the borrower paid 4 points, which is equal to 4% of $100,000, or $4,000.

So the total amount borrowed is $100,000 - $4,000 = $96,000.

The interest rate is 6%, but because we paid points upfront, the actual interest rate is higher.

To calculate the effective annual interest rate, we can use the following formula:

Effective annual interest rate = (1 + interest rate / number of compounding periods) ^ number of compounding periods - 1

Since this is a 30-year loan, number of compounding periods per year is 12, so:

Effective annual interest rate = (1 + 0.06 / 12) ^ 12 - 1
Effective annual interest rate = 0.061678 or 6.17%

However, this is not the final answer because we need to take into account the points paid upfront.

The effective annual interest rate is:

Effective annual interest rate = total interest paid / amount borrowed

To calculate the total interest paid, we can use the following formula:

Total interest paid = monthly payment * number of payments - amount borrowed

We can use a mortgage calculator to find the monthly payment. Using a 30-year mortgage with a loan amount of $96,000 and an interest rate of 6%, the monthly payment is $575.96.

Number of payments is 30 years * 12 months per year = 360.

Total interest paid = $575.96 * 360 - $96,000 = $123,626.49

Effective annual interest rate = $123,626.49 / $96,000 = 1.2888 or 128.88%

To convert this to a percentage, we need to multiply by 100 and round to one decimal place:

Effective annual interest rate = 128.88% or 12.9%

Therefore, the effective annual interest rate on the loan is 6% (the stated interest rate) plus the cost of points, which is 12.9% - 6% = 6.9%.

The best choice is C) 6.4%, which is the closest answer to our calculated value of 6.9%.

Question 11

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

The answer of One difference between the constant amortizing mortgage...

Question 12

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

Accepted Answer

The answer of Graduated payment mortgage are loans available to...

Question 13

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

Accepted Answer

The answer of Inflation makes very little difference to lenders...

Question 14

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

Accepted Answer

The answer of With a reverse annuity mortgage the borrower...

Question 15

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

Accepted Answer

The answer of Determining a loan balance on a CPM...

Question 16

A borrower takes out a 30-year mortgage loan for $250,000 with an interest rate of 5%.What would the monthly payment be?&#10;A)$694&#10;B)$1,042&#10;C)$1,342&#10;D)$1,355&#10;E)Not enough information

Accepted Answer

The answer of A borrower takes out a 30-year mortgage...

Question 17

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

Accepted Answer

The answer of Prepayment penalties increase the lender's mortgage yield...

Question 18

A borrower obtains a $150,000 reverse annuity 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?&#10;A)$820&#10;B)$863&#10;C)$1,250&#10;D)$1,820

Accepted Answer

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

Question 19

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

Accepted Answer

The answer of The APR for a loan assumes it...

Question 20

With every CPM,the effective costs of borrowing are higher than the stated rate of the loan

Accepted Answer

The answer of With every CPM,the effective costs of borrowing...

Question 21

Which one of the following is TRUE about Prepayment penalties:&#10;A)They are never used with residential mortgages&#10;B)They lower the effective cost if the loan is repaid before maturity&#10;C)They are equivalent to charging additional points for the loan&#10;D)They are not included in the APR calculation

Accepted Answer

The answer of Which one of the following is TRUE...

Question 22

Over the life of the loan,which of the following loans would continually have a lower principal balance given each loan had the same term,principal amount,and average interest rate?&#10;A)CAM&#10;B)CPM&#10;C)GPM&#10;D)Cannot be determined with this information

Accepted Answer

The answer of Over the life of the loan,which of...

Question 23

In comparison to the first month's payment of a CAM,the first month's payment of a CPM:&#10;A)Is higher&#10;B)Is lower&#10;C)Is the same&#10;D)Cannot be determined with this information

Accepted Answer

The answer of In comparison to the first month's payment...

Question 24

Assuming all APRs equal,the effective interest rate on a loan is highest when:&#10;A)The loan has no points and a 30 year maturity and is prepaid in five years&#10;B)The loan has no points and is prepaid at maturity&#10;C)Points are charged and the loan is paid off at maturity in 30 years&#10;D)Points are charged and the loan has a 30 year maturity but prepaid in five years

Accepted Answer

The answer of Assuming all APRs equal,the effective interest rate...

Question 25

APR stands for which of the following?&#10;A)Annual percentage rate&#10;B)Amortized percentage regulator&#10;C)Accrued percentage rate&#10;D)Annual percentage regulator

Accepted Answer

The answer of APR stands for which of the following?&#10;A)Annual...

Question 26

At the end of five years,calculating the loan balance of a constant payment mortgage is simply the:&#10;A)Present value of a single amount&#10;B)Future value of a single amount&#10;C)Present value of an ordinary annuity&#10;D)Future value of an ordinary annuity

Accepted Answer

The answer of At the end of five years,calculating the...

Question 27

Because its payment stream looks like a staircase,which loan is sometimes referred to as &#34;stepped-up&#34; financing due to prearranged payment increases?&#10;A)CAM&#10;B)CPM&#10;C)GPM&#10;D)ARM

Accepted Answer

The answer of Because its payment stream looks like a...

Question 28

Demand for a mortgage loan is considered:&#10;A)Stable demand&#10;B)Derived demand&#10;C)Interest rate demand&#10;D)Nominal demand

Accepted Answer

The answer of Demand for a mortgage loan is considered:&#10;A)Stable...

Question 29

One of the first amortizing mortgages was the constant amortization mortgage.Which of the following characterized the components of the CAM payment over the life of the loan? Interest Amortization Paymen

A)Decreasing Decreasing Decreasing
B)Constant Decreasing Decreasing
C)Decreasing Constant Decreasing
D)Constant Constant Constant

Accepted Answer

The answer of One of the first amortizing mortgages was...

Question 30

Which of the following closing costs do not increase the lender's effective loan yield?&#10;A)Discount points&#10;B)Prepayment penalties&#10;C)Title insurance charges&#10;D)Origination fees

Accepted Answer

The answer of Which of the following closing costs do...

Question 31

Which mortgage would a borrower prefer to have during inflationary and recessionary periods? Inflationary Recessionary&#10;A)CPM GPM&#10;B)GPM CAM&#10;C)CPM CAM

Accepted Answer

The answer of Which mortgage would a borrower prefer to...

Question 32

Points are also known as:&#10;A)Third party charges&#10;B)Reduction in payment amount&#10;C)Loan discount fees&#10;D)Reduction of mortgage yield

Accepted Answer

The answer of Points are also known as:&#10;A)Third party charges&#10;B)Reduction...

Question 33

One of the most popular amortizing mortgages today is the constant payment mortgage.Which of the following characterizes the components of the CPM payment over the life of the loan? Interest Amortization Paymen

A)Decreasing Decreasing Decreasing
B)Increasing Decreasing Constant
C)Decreasing Increasing Constant
D)Constant Constant Constant

Accepted Answer

The answer of One of the most popular amortizing mortgages...

Deck 4: Fixed Rate Mortgage Loans