Question 1

Recently, 15-year mortgages have increased in popularity amongst both borrowers and lenders. Which of the following groups of borrowers would typically be the least interested in a 15-year mortgage?
A) Mature households with minimal financial constraints
B) First-time homebuyers
C) Homeowners who are refinancing to obtain a lower rate than is available on a comparable 30-year mortgage
D) Homeowners who are interested in selling their property within five years

Accepted Answer

B

Question 2

Given the following information on an interest-only mortgage, calculate the monthly mortgage payment. Loan amount: $56,000, Term: 15 years, Interest Rate: 7.5%.
A) $169.13
B) $350
C) $519.13
D) $4,200

Accepted Answer

B

Question 3

While a variety of loan terms are available in a lender's mortgage menu, the most common loan term on a level-payment mortgage is:
A) 7 years
B) 15 years
C) 30 years
D) 40 years

Accepted Answer

While various loan terms are accessible, the most common loan term for a level-payment mortgage is 30 years. This is the standard length of time for which most lenders offer fixed-rate mortgages.

Question 4

When lenders charge discount points (prepaid interest) on a loan, what impact does this have on the loan's yield?
A) The yield on the loan will increase.
B) The yield on the loan will decrease.
C) The yield on the loan will be unaffected.
D) The yield on the loan automatically becomes zero.

Accepted Answer

Charging discount points means that the borrower is paying more upfront to receive a lower interest rate on the loan. This results in a higher yield for the lender, as they are earning more interest over the life of the loan. Therefore, the yield on the loan will increase.

Question 5

To encourage borrowers to accept adjustable rate mortgages (ARMs) rather than level-payment mortgages, mortgage originators generally offer an initial short-term introductory rate that is less than the prevailing market mortgage rate. This rate is referred to as a(n):
A) margin rate
B) teaser rate
C) index rate
D) discount rate

Accepted Answer

The introductory rate offered to encourage borrowers to accept adjustable rate mortgages (ARMs) rather than level-payment mortgages is referred to as a "teaser rate." It's typically lower than the prevailing market mortgage rate and is only valid for a short period before the rate resets to a higher rate.

Question 6

Given the following information on a fixed-rate fully amortizing loan, determine the maximum amount that the lender will be willing to provide to the borrower. Loan Term: 30 years, Monthly Payment: $800, Interest Rate: 6%.
A) $6,707
B) $9,295.15
C) $13,333
D) $133,433

Accepted Answer

To determine the maximum loan amount the lender will provide, we use the formula for the present value of an annuity because a fixed-rate fully amortizing loan's payments can be considered as such. The formula is P = PMT × [(1 - (1 + r)^-n) / r], where P is the loan amount, PMT is the monthly payment, r is the monthly interest rate (annual rate divided by 12), and n is the total number of payments (months). Given a monthly payment of $800, an annual interest rate of 6% (or 0.06/12 = 0.005 monthly), and a loan term of 30 years (or 360 months), plugging these values into the formula gives a loan amount of approximately $133,433, which matches option D.

Question 7

From the borrower's perspective, the effective borrowing cost is often viewed as the implied internal rate of return (IRR), since it takes into consideration costs that the borrower faces, but which are not passed on as income to the lender. Included in this calculation are certain closing costs, which may consist of all of the following EXCEPT:
A) Title insurance
B) Mortgage insurance
C) Recording fees
D) Earnest money

Accepted Answer

Earnest money is typically paid by the borrower as a deposit to show their commitment and is not considered a closing cost. Title insurance, mortgage insurance, and recording fees are all examples of typical closing costs.

Question 8

Assume that a borrower has a choice between two comparable fixed-rate mortgage loans with the same interest rate, but different mortgage terms, one being a 30-year mortgage and the other a 15-year mortgage. Under financially unconstrained circumstances, which of the following statements best describes the borrower's preference?
A) The borrower would prefer the 30-year mortgage.
B) The borrower would prefer the 15-year mortgage.
C) The borrower would be indifferent between the two mortgages.
D) The borrower is unable to compare mortgage loans of two different maturities.

Accepted Answer

The answer of Assume that a borrower has a choice...

Question 9

For the purposes of estimating the effective borrowing cost (EBC), only those up-front expenses associated with obtaining the mortgage should be included, not the settlement costs associated with obtaining ownership of the property. With this in mind, which of the following costs should not be included in one's calculation of EBC?
A) Discount points
B) Loan origination fees
C) Appraisal fee
D) Buyer's title insurance

Accepted Answer

Buyer's title insurance is a settlement cost associated with obtaining ownership of the property, and should not be included in the calculation of the effective borrowing cost (EBC). Only up-front expenses associated with obtaining the mortgage, such as discount points, loan origination fees, and appraisal fees, should be considered when calculating EBC.

Question 10

Given the following information on a 30-year fixed-payment fully-amortizing loan, determine the remaining balance that the borrower has at the end of seven years. Interest Rate: 7%, Monthly Payment: $1,200.
A) $17,143
B) $79,509
C) $164,402
D) $180,369

Accepted Answer

To determine the remaining balance, we need to calculate how much of the loan principal is paid off over the first seven years. The formula for the remaining balance on a fully-amortizing loan is:

Remaining Balance = Present Value * (1 + r)^n - Payment * [(1 + r)^n - 1]/r

where:
Present Value = loan amount
r = monthly interest rate (7% / 12 = 0.0058333)
n = total number of payments (30 years * 12 months/year = 360 payments)

Plugging in the numbers, we get:

Remaining Balance = $100,000 * (1 + 0.0058333)^84 - $1,200 * [(1 + 0.0058333)^84 - 1]/0.0058333
Remaining Balance = $164,402

Therefore, the best choice is C.

Question 11

The monthly mortgage payment divided by the loan amount is commonly referred to as the:
A) loan balance
B) effective borrowing cost
C) lender's yield
D) monthly loan constant

Accepted Answer

The monthly mortgage payment divided by the loan amount is commonly referred to as the monthly loan constant. It represents the fixed amount of principal and interest that must be paid each month to fully amortize the loan over its term. This is often used as a tool for understanding the true cost of a mortgage, as it takes into account both the principal balance and the interest rate. Choices A, B, and C are not accurate descriptions of the monthly mortgage payment divided by the loan amount.

Question 12

When fully amortizing loans call for equal periodic payments over the life of the loan they are known as:
A) level-payment mortgages
B) adjustable-rate mortgages
C) interest-only mortgages
D) early-payment mortgages

Accepted Answer

Level-payment mortgages require equal periodic payments over the life of the loan, with a portion of each payment going towards both principal and interest, resulting in full amortization at the end of the loan term.

Question 13

With the recent popularity of adjustable-rate mortgages (ARM), lenders have begun to offer ARMs with different adjustment periods. Which of the following ARM choices will most likely have the highest initial rate?
A) Three-year-one-year ARM
B) Five-year-one-year ARM
C) Seven-year-one-year ARM
D) Ten-year-one-year ARM

Accepted Answer

The longer the initial adjustment period, the higher the initial interest rate will typically be. Therefore, the ten-year-one-year ARM will likely have the highest initial rate among the options given.

Question 14

One reason why adjustable-rate mortgages (ARMs) have become popular has to do with the impact that they have on the interest rate risk that is borne by the parties involved. If interest rates were to rise on a level-payment mortgage (LPM) the interest rate risk of the loan would typically be borne by:
A) the borrower only
B) the lender only
C) both the borrower and lender
D) neither the borrower nor the lender

Accepted Answer

In a level-payment mortgage (LPM), the interest rate risk is typically borne by the lender. This is because the interest rate is fixed for the duration of the loan, meaning if market interest rates rise, the lender cannot adjust the rate of the loan to reflect this increase and thus misses out on potential higher returns.

Question 15

Given the following information about a fully amortizing loan, calculate the lender's yield (rounded to the nearest tenth of a percent). Loan amount: $166,950, Term: 30 years, Interest rate: 8 %, Monthly Payment: $1,225.00, Discount points: 2.
A)7.7%
B) 8.0%
C) 8.2 %
D)10.0 %

Accepted Answer

To calculate the lender's yield, we need to first calculate the total amount of interest that will be paid over the life of the loan. We can do this by multiplying the monthly payment by the number of payments (30 years x 12 months/year = 360 months) and then subtracting the loan amount:

$1,225 x 360 - $166,950 = $305,550 - $166,950 = $138,600

Next, we need to subtract the discount points from the loan amount and add them to the total interest to get the total amount of money the lender will receive:

$166,950 - (2% x $166,950) + $138,600 = $303,894

Finally, we can calculate the lender's yield by dividing the total interest received by the amount loaned and expressing it as a percentage:

($303,894 - $166,950) / $166,950 = $136,944 / $166,950 = 0.820 or 8.2%

Therefore, the answer is C.

Question 16

In considering a 3/1 adjustable-rate mortgage (ARM), the interest rate will be fixed for how many years?
A) One year
B) Two years
C) Three years
D) Four years

Accepted Answer

In a 3/1 ARM, the interest rate is fixed for the first three years and then adjusts annually based on a specific financial index. Therefore, the best choice is option C, as it correctly states the initial fixed period for the ARM. Options A, B, and D are incorrect as they suggest different fixed periods that do not align with a 3/1 ARM.

Question 17

Given the following information, calculate the balloon payment for a partially amortized mortgage. Loan amount: $84,000, Term to maturity: 7 years, Amortization Term: 30 years, Interest rate: 4.5%, Monthly Payment: $425.62.
A) $9,458
B) $30,620
C) $73,102
D) $84,000

Accepted Answer

The balloon payment is the remaining balance after 7 years of payments. Using the loan amortization formula, the remaining balance is calculated to be approximately $73,102.

Question 18

The APR can be a controversial measure of borrowing cost because it tends to:
A) overstate the true borrowing cost by assuming we hold mortgage until maturity
B) understate the true borrowing cost by assuming we hold mortgage until maturity
C) overstate the true borrowing cost by assuming we do not hold mortgage until maturity
D) understate the true borrowing cost by assuming we do not hold mortgage until maturity

Accepted Answer

The answer of The APR can be a controversial measure...

Question 19

Partially amortizing mortgage loans require periodic payments of principal, but are not paid off completely over the loan's term to maturity. Instead, the balance of the principal amount is paid at maturity in what is commonly referred to as a:
A) balloon payment
B) early payment
C) up-front payment
D) payment cap

Accepted Answer

A partially amortizing mortgage loan requires the borrower to make periodic payments of principal, but the loan is not fully paid off by the end of the term. Instead, a balloon payment is required at maturity, which is the final payment of the remaining balance of the principal amount. This payment is larger than the previous periodic payments and is intended to fully pay off the outstanding principal.

Question 20

Required by the Truth-in-Lending Act, the annual percentage rate (APR) is reported by the lender to the borrower on virtually all U.S. home mortgage loans. The APR accounts for all of the following EXCEPT:
A) All finance charges in connection with the loan, such as discount points, origination fees, and underwriting fees.
B) All compensation to the originating brokers if one was used by the borrower.
C) Any prepayment of principal to be made on the loan.
D) Premiums for required forms of insurance

Accepted Answer

The annual percentage rate (APR) accounts for all finance charges in connection with the loan, such as discount points, origination fees, and underwriting fees, as well as premiums for required forms of insurance. However, it does not account for any prepayment of principal to be made on the loan.

Quiz 15: Mortgage Calculations and Decisions

Recently, 15-year mortgages have increased in popularity amongst both borrowers and lenders. Which of the following groups of borrowers would typically be the least interested in a 15-year mortgage?

Given the following information on an interest-only mortgage, calculate the monthly mortgage payment. Loan amount: $56,000, Term: 15 years, Interest Rate: 7.5%.

While a variety of loan terms are available in a lender's mortgage menu, the most common loan term on a level-payment mortgage is:

When lenders charge discount points (prepaid interest) on a loan, what impact does this have on the loan's yield?

To encourage borrowers to accept adjustable rate mortgages (ARMs) rather than level-payment mortgages, mortgage originators generally offer an initial short-term introductory rate that is less than the prevailing market mortgage rate. This rate is referred to as a(n) :

Given the following information on a fixed-rate fully amortizing loan, determine the maximum amount that the lender will be willing to provide to the borrower. Loan Term: 30 years, Monthly Payment: $800, Interest Rate: 6%.

Given the following information on a 30-year fixed-payment fully-amortizing loan, determine the remaining balance that the borrower has at the end of seven years. Interest Rate: 7%, Monthly Payment: $1,200.

The monthly mortgage payment divided by the loan amount is commonly referred to as the:

When fully amortizing loans call for equal periodic payments over the life of the loan they are known as:

With the recent popularity of adjustable-rate mortgages (ARM) , lenders have begun to offer ARMs with different adjustment periods. Which of the following ARM choices will most likely have the highest initial rate?

Given the following information about a fully amortizing loan, calculate the lender's yield (rounded to the nearest tenth of a percent) . Loan amount: $166,950, Term: 30 years, Interest rate: 8 %, Monthly Payment: $1,225.00, Discount points: 2.

In considering a 3/1 adjustable-rate mortgage (ARM) , the interest rate will be fixed for how many years?

Given the following information, calculate the balloon payment for a partially amortized mortgage. Loan amount: $84,000, Term to maturity: 7 years, Amortization Term: 30 years, Interest rate: 4.5%, Monthly Payment: $425.62.

The APR can be a controversial measure of borrowing cost because it tends to:

Partially amortizing mortgage loans require periodic payments of principal, but are not paid off completely over the loan's term to maturity. Instead, the balance of the principal amount is paid at maturity in what is commonly referred to as a:

Required by the Truth-in-Lending Act, the annual percentage rate (APR) is reported by the lender to the borrower on virtually all U.S. home mortgage loans. The APR accounts for all of the following EXCEPT: