Question 1

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 2

For the purposes of estimating the effective borrowing cost (EBC),only those up-front expenses associated with obtaining the mortgage should be included.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

Only up-front expenses associated with obtaining the mortgage should be included in the calculation of EBC. Buyer's title insurance is not directly related to obtaining a mortgage, but rather to the protection of the buyer's ownership rights to the property. Therefore, it should not be included in the calculation of EBC. Discount points, loan origination fees, and appraisal fees are all up-front expenses directly related to obtaining a mortgage and should be included in the calculation of EBC.

Question 3

Given the following information on a fixed-rate 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

The maximum loan amount can be calculated using the formula for the present value of an annuity. Given the monthly payment, interest rate, and loan term, the present value (loan amount) is approximately $133,433.

Question 4

In considering a three-year-one-year 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

With a three-year-one-year ARM, the interest rate will be fixed for the first three years of the mortgage, and then adjust annually after that for the remaining years of the loan term. Therefore, the best choice would be C) Three years.

Question 5

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 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

Closing costs typically include title insurance, mortgage insurance, and recording fees, but earnest money is not typically considered a closing cost. Earnest money is a deposit made by the buyer to show their good faith in the purchase and is usually applied towards the down payment or closing costs.

Question 6

Given the following information,calculate the lender's yield.Loan amount: $166,950,Term: 30 years,Interest rate: 8 %,Payment: $1,225.00,Discount points: 2.
A)7.7%
B)8.0%
C)8.2 %
D)10.0 %

Accepted Answer

The lender's yield is the effective interest rate earned on the loan after accounting for any upfront costs the borrower paid. In this case, the borrower paid 2 discount points upfront, which is equal to 2% of the loan amount. Therefore, the loan amount after discount points is $163,621. To calculate the lender's yield, we need to use Excel or a financial calculator to find the internal rate of return (IRR) of the loan payments, which is 8.2%. Therefore, the best choice is C, 8.2%.

Question 7

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. The loan balance refers to the amount still owed on the loan, the effective borrowing cost is a measure of the total cost of borrowing (including interest and fees), and the lender's yield is the return the lender earns on the loan. None of these relate directly to the monthly mortgage payment divided by the loan amount.

Question 8

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

When lenders charge discount points, the borrower pays an upfront fee to lower their interest rate. This prepaid interest increases the yield on the loan for the lender, as they will be receiving a higher amount of interest over the life of the loan. Therefore, the yield on the loan will increase.

Question 9

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 balloon payment is a large payment due at the end of a loan term, typically for partially amortizing mortgage loans. It is called a balloon payment because it "inflates" the remaining balance of the loan, requiring a large lump sum payment to pay off the loan completely.

Question 10

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 11

Given the following information on a 30-year fixed-payment 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 find the remaining balance after seven years, we need to calculate how much of the principal has been paid off in seven years. We can use an amortization table to do this calculation.

After seven years of making monthly payments of $1,200 at an interest rate of 7%, the remaining balance on the loan would be $164,402. This means that the borrower has paid off 21.47% of the original loan amount over the course of seven years.

Therefore, the correct answer is C.

Question 12

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

With a level-payment mortgage, both the borrower and the lender share the interest rate risk. If interest rates rise, the borrower may struggle to make the higher payments, while the lender may have difficulty selling the mortgage on the secondary market or may need to pay higher interest rates to attract investors. Adjustable-rate mortgages, on the other hand, shift some of the interest rate risk to the borrower, as their payments can increase or decrease as interest rates change.

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

Given the following information,calculate the effective borrowing cost (EBC).Loan amount: $166,950,Term: 30 years,Interest rate: 8 %,Payment: $1,225.00,Discount points: 2,Other Closing Expenses: $3,611.
A)7.7%
B)8.2%
C)8.5%
D)9.1%

Accepted Answer

The effective borrowing cost (EBC) considers the interest rate, discount points, and other closing costs. The EBC is higher than the nominal interest rate due to these additional costs. Calculating the EBC involves adjusting the loan amount for the discount points and closing costs, then determining the interest rate that equates the adjusted loan amount to the present value of the loan payments. In this case, the EBC is approximately 8.5%.

Question 15

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. It also includes all compensation to the originating brokers if one was used by the borrower. However, it does not account for any prepayment of principal to be made on the loan.

Question 16

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 options exist for various loan terms, the most common loan term on a level-payment mortgage is typically 30 years. This provides borrowers with a standardized repayment schedule and the flexibility to make additional payments or pay off the mortgage early if desired.

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)$73,103
D)$84,000

Accepted Answer

The balloon payment is the remaining balance of the loan after the 7-year term. Using the loan details, calculate the remaining balance after 7 years of payments, which is approximately $73,103.

Question 18

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)floating rate
B)teaser rate
C)index rate
D)discount rate

Accepted Answer

A teaser rate is a short-term, introductory rate that is lower than the prevailing market mortgage rate. This rate is offered to encourage borrowers to accept adjustable rate mortgages (ARMs) rather than level-payment mortgages. The other options (floating rate, index rate, discount rate) do not specifically refer to the initial short-term introductory rate offered in ARMs.

Question 19

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 are fully amortizing loans that require equal periodic payments over the life of the loan. This means that the payments stay the same each month, and the loan is paid off entirely by the end of the term. Adjustable-rate mortgages have variable interest rates that can change over time, while interest-only mortgages only require borrowers to pay the interest on the loan for a certain period of time before larger payments are due. Early-payment mortgages do not exist as a specific type of loan.

Question 20

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

The answer of Recently,15-year mortgages have increased in popularity amongst...

Quiz 15: Mortgage Calculations and Decisions

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%.

For the purposes of estimating the effective borrowing cost (EBC) ,only those up-front expenses associated with obtaining the mortgage should be included.With this in mind,which of the following costs should not be included in one's calculation of EBC?

Given the following information on a fixed-rate 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%.

In considering a three-year-one-year adjustable-rate mortgage (ARM) ,the interest rate will be fixed for how many years?

Given the following information,calculate the lender's yield.Loan amount: $166,950,Term: 30 years,Interest rate: 8 %,Payment: $1,225.00,Discount points: 2.

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

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

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:

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

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,calculate the effective borrowing cost (EBC) .Loan amount: $166,950,Term: 30 years,Interest rate: 8 %,Payment: $1,225.00,Discount points: 2,Other Closing Expenses: $3,611.

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:

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:

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.

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) :

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

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?