Exam 6: Mortgages: Additional Concepts, analysis, and Applications

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.

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%.

Which of the following is TRUE concerning wraparound Loans?

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?

Which of the following is FALSE concerning buydown loans?

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

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?

Which of the following statements concerning a 30 year,$150,000 loan at 7% with monthly payments is true,if 15 years later,an investor wants to purchase the loan and market interest rates are 5%?

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

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?

The incremental cost of borrowing may also be referred to as the marginal cost of borrowing.

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?

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 $87,978.99.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?

Ms.Towne is buying a home for $250,000 and is putting down 20% cash on the purchase.She is financing the rest with a 30-yr,fixed rate mortgage with a rate of 4.625%,but is considering an option that would allow her to make biweekly payments.How much interest would the biweekly payment option allow her to save over the life of the loan and how long would it take to pay off the loan?

Which of the following is an important aspect of the loan refinance decision process?

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?

The primary benefit of choosing biweekly mortgage payments versus monthly payments is the savings from lowering the average amount paid each month.

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.

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?

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