Deck 6: Mortgages: Additional Concepts, Analysis, and Applications

Question 1

Buydown loans have initial payments that are lower than they would be without the buydown provision

Answer 1

True

Question 2

A borrower has secured a 30 year,$150,000 loan at 7% with monthly payments.Fifteen years later,an investor wants to purchase the loan from the lender.If market interest rates are 5%,what would the investor be willing to pay for the loan?

A)$75,000
B)$111,028
C)$118,478
D)$168,646

Answer 2

$118,478

Question 3

If interest rates decrease,the market value of a loan previously make will increase

Answer 3

True

Question 4

When purchasing a $210,000 house,a borrower is comparing two loan alternatives.The first loan is a 90% loan at 10.5% for 25 years.The second loan is an 85% loan for 9.75% over 15 years.Both have monthly payments and the property is expected to be held over the life of the loan.What is the incremental cost of borrowing the extra money?

A)20.25%
B)16.17%
C)11.36%
D)12.42%

Question 5

A loan with biweekly payments will have more interest than a monthly loan with the same interest rate and loan term

Question 6

Homeowners should not borrow refinancing costs because the effective rate of refinancing will be higher

Question 7

Home equity loans do not require a mortgage lien on the property

Question 8

Use the information in problem 1,except assume that the loan will be repaid in 5 years.What is the incremental cost of borrowing the extra money?

A)13.95%
B)13.67%
C)14.42%
D)12.39%

Question 9

A borrower made a mortgage loan 7 years ago for $160,000 at 10.25% interest for 30 years.The loan balance is now $151,806.62 and rates for this amount are currently 9.0% for 23 years.Origination fees and closing costs are $4,500 and closing costs are not financed by the lender.What is the effective cost of refinancing?

A)9.00%
B)10.85%
C)15.32%
D)9.39%

Question 10

A borrower finds that the incremental cost of borrowing an extra $10,000 is 14%.The borrower can earn 12% on alternative investments of comparable risk so he would be better off by not borrowing the extra 14%

Question 11

A house that is financed with a below-market loan is available for sale.The value of the house will be higher than similar properties regardless of the other terms of the loan

Question 12

A potential buyer is interested in purchasing a home that has an assumable below-market loan.The buyer determines that the financing premium associated with the below-market loan is worth $4,300.If similar houses sell for $100,000,the buyer should be willing to pay $104,300 or more for the property

Question 13

A house is for sale for $250,000.You have a choice of two 20-year mortgage loans with monthly payments: 1 if you make a down payment of $25,000,you can obtain a loan with a 6% rate of interest or 2 if you make a down payment of $50,000,you can obtain a loan with a 5% rate of interest.What is the effective annual rate of interest on the additional $25,000 borrowed on the first loan?

A)1.00%
B)6.00%
C)12.95%
D)18.67%
E)20.10%

Question 14

A borrower finds that the incremental cost of borrowing an extra $10,000 is 14%.A second loan can be obtained at 15% so the borrower would be better off by borrowing with the smaller loan and a second mortgage

Question 15

Which of the following statements about the loan in the question above are TRUE?

A)The market value of the loan is higher than the book value of the loan because the market rate of interest is lower than the interest rate on the loan
B)The market value of the loan is lower than the book value of the loan because the market rate of interest is lower than the interest rate on the loan
C)The market value of the loan is higher than the book value of the loan because the market rate of interest is higher than the interest rate on the loan
D)The market value of the loan is lower than the book value of the loan because the market rate of interest is higher than the interest rate on the loan

Question 16

A borrower has secured a 30 year,$150,000 loan at 7% with monthly payments.Fifteen years later,the borrower has the opportunity to refinance with a fifteen year mortgage at 6%.However,the up front fees,which will be paid in cash,are $2,500.What is the return on investment if the borrower expects to remain in the home for the next fifteen years?

A)6.00%
B)7.00%
C)13.00%
D)22.62%
E)28.89%

Question 17

A borrower is purchasing a property for $180,000 and can choose between two possible loan alternatives.The first is a 90% loan for 25 years at 9% interest and 1 point and the second is a 95% loan for 25 years at 9.25% interest and 1 point.Assuming the loan will be held to maturity,what is the incremental cost of borrowing the extra money?

A)13.66%
B)13.50%
C)14.34%
D)12.01%

Question 18

The effective cost of a wraparound loan should be comparable to the cost of a second mortgage with the same loan-to-value ratio

Question 19

The cash equivalent value of a house that sold with favorable financing is usually less than its sale price

Question 20

A borrower is considering refinancing and finds that the return,considering refinancing charges and lower payments,is 10%.The borrower can earn 12% on alternative investments so the property should be refinanced

Question 21

Mr.Tramp made a mortgage 5 years ago for $85,000 at 8.25% interest and a 15 year term.Rates have now risen to 10% for an equivalent loan.Mr.Tramp's lender is willing to discount the loan by $2,000 if he will prepay the loan.What rate of return would Mr.Tramp receive by prepaying the loan?

A)10.24%
B)8.95%
C)14.32%
D)9.14%

Question 22

A house is sold with an assumable $156,000 below-market loan at 8.5% for a remaining term of 15 years.Current rates are 9.75% for 15 year mortgages.If the house sold for $240,000,what is the cash-equivalent value of the house.

A)$250,834.82
B)$229,165.18
C)$260,660.40
D)$219,339.60

Question 23

Bud is offering a house for sale for $180,000 with an assumable loan which was made 5 years ago for $140,000 at 8.75% over 30 years.Kelsey is interested in buying the property and can make a $20,000 down payment.A second mortgage can be obtained for the balance at 12.5% for 25 years.What is the effective cost of the combined loans,if Kelsey would like to compare this financing alternative to obtaining a first mortgage for the full amount?

A)10.63%
B)9.39%
C)9.04%
D)11.27%

Question 24

Which of the following is FALSE concerning buydown loans?

A)They are often used during periods of high inflation
B)They always lower the rate on the loan for the borrower for the entire loan term
C)Help borrowers qualify for a loan
D)They can be offered by home builders

Question 25

When calculating the cash equivalent value of an assumable loan,you find the present value of the payments using the:

A)Contract interest rate
B)Incremental borrowing cost
C)Market interest rate
D)Discount rate

Question 26

Which of the following is TRUE regarding the incremental cost of borrowing?

A)It should be less than the rate for a first mortgage
B)It should be compared to the cost of obtaining a second mortgage
C)It is used to calculate the APR for the loan
D)It is independent of loan-to-value ratio

Question 27

Ms.Madison has an existing loan with payments of $782.34.The interest rate on the loan is 10.5% and the remaining loan term is 10 years.The current balance of the loan is $57,978.99.The home is now worth $120,000 and Ms.Madison would like to borrow an additional $30,000 through a wraparound loan which would increase the debt to 487,978.99.Terms of the wraparound loan are 12.25% interest with monthly payments for 10 years.What is the incremental cost of borrowing the extra $30,000 through a wraparound loan?

A)15.47%
B)11.38%
C)12.96%
D)13.41%

Question 28

The market value of a loan is:

A)The loan balance times one minus the market rate
B)The loan balance times one minus the original rate
C)The future value of the remaining payments
D)The present value of the remaining payments

Question 29

Mr.Fisher has built several houses and is offering buyers mortgage rates of 10% with 15 year term.Current rates are 10.75%.Fourth National Bank will provide the loans,if Mr.Fisher pays an equivalent amount up front to buy down the interest rate.If a house is sold for $290,000 with a 90% loan,how much would Mr.Fisher have to pay to buy down the loan?

A)$1,957.50
B)$11,989.34
C)$11,250.25
D)$10,790.41

Question 30

A loan was made 10 years ago for $140,000 at 10.5% for a 30 year term.Rates are currently 9.25%.What is the market value of the loan?

A)$128,271
B)$147,600
C)$139,828
D)$151,395

Question 31

Which of the following is TRUE concerning Wraparound Loans?

A)The borrower makes payments on existing loan
B)The lender makes payments on existing loan
C)The lender only makes payments on the second mortgage
D)The borrower only makes payments on the second mortgage