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

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

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 borrowing a smaller amount on the original loan and borrowing $10,000 with a second loan.

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

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

Mr.Fisher has built several houses and is offering buyers mortgage rates of 10% with a 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?

The market value of a loan is:

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.

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

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

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 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 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?

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

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 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 repaid in 5 years,what is the incremental cost of borrowing the extra money?