Deck 15: Mortgage Calculations and Decisions

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

Answer 1

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

Answer 2

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

Answer 3

C

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.

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

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

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

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.

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

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

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

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

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

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

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 %

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

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

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

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

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

Question 21

Assume you have taken out a partially amortizing loan for $325,000 that has a term of 7 years, but amortizes over 30 years. Calculate the balloon payment at maturity (Year 7) if the interest rate on this loan is 4.5%.

A) $1,646.73
B) $118,468.21
C) $282,835.42
D) $324,572.02

Question 22

Assume you have taken out a partially amortizing loan for $1,000,000 that has a term of 7 years, but amortizes over 20 years. Calculate the balloon payment if the interest rate on this loan is 9%.

A) $8,997
B) $559,199
C) $825,679
D) $936,405

Question 23

You have taken out a $225,000, 3/1 ARM. The initial rate of 5.8% (annual) is locked in for 3 years and is expected to increase to 6.5% at the end of the lock period. Calculate the initial payment on the loan. (Note: the term on this 3/1 ARM is 30 years)

A) $1,320.19
B) $1,422.15
C) $1,874.45
D) $1959.99

Question 24

You have taken out a $100,000, one-year ARM. The teaser rate in the first year is 4.5% (annual). The index interest rate after the first year is 3.25% and the margin is 2.75%. (Note: the term on this ARM is 30 years). There is also a periodic (annual) rate cap of 1.00%. Given this information, determine the monthly mortgage payment you would be scheduled to make in month 1 of the mortgage loan's term.

A) $321.64
B) $506.69
C) $567.79
D) $599.55

Question 25

Suppose you have taken out a $200,000 fully-amortizing fixed rate mortgage loan that has a term of 15 years and an interest rate of 4.25%. In month 2 of the mortgage, how much of the monthly mortgage payment does the principal repayment portion consist of?

A) $705.51
B) $708.33
C) $796.22
D) $799.04

Question 26

Let's assume that you have just taken out a mortgage loan for $200,000 with an origination fee of 2 points due upfront. The mortgage term is 30 years and the mortgage rate is fixed at 4%. What is the cost of the origination fee in dollar terms?

A) $400.00
B) $954.83
C) $4000.00
D) $4954.83

Question 27

Suppose you have taken out a $325,000 fully-amortizing fixed rate mortgage loan that has a term of 30 years and an interest rate of 5.5%. In month 10 of the mortgage, how much of the monthly mortgage payment does the interest portion consist of?

A) $370.68
B) $1,474.64
C) $1,489.58
D) $1,845.31

Question 28

Given the following information, calculate the effective borrowing cost (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, Other Closing Expenses: $3,611.

A) 7.7%
B) 8.2%
C) 8.5%
D) 9.1%

Question 29

Suppose a potential home buyer is interested in taking a $500,000 mortgage loan that has a term of 30 years and a fixed mortgage rate of 5.25%. What is the monthly mortgage payment that the homeowner would need to make if this loan is fully amortizing?

A) $552.50
B) $2,761.02
C) $17,820.72
D) $33,458.47

Question 30

You have taken out a $350,000, 3/1 ARM. The initial rate of 6.0% (annual) is locked in for 3 years. Determine the owner's equity in the property after 3 years if the market value of the property at the end of year 3 is $400,000. The interest rate after the initial lock period is 6.5%. (Note: the term on this 3/1 ARM is 30 years)

A) $13,705.75
B) $50,000.00
C) $63,705.75
D) $336,294.25

Question 31

Suppose you have taken out a $125,000 fully-amortizing fixed rate mortgage loan that has a term of 15 years and an interest rate of 6%. After your first mortgage payment, how much of the original loan balance is remaining?

A) $1,054.82
B) $120,603.78
C) $124,570.18
D) $124,875.56

Question 32

You have taken out a $350,000, 3/1 ARM. The initial rate of 6.0% (annual) is locked in for 3 years. Calculate the outstanding balance on the loan after 3 years. The interest rate after the initial lock period is 6.5%. (Note: the term on this 3/1 ARM is 30 years)

A) $2,098.43
B) $2,183.95
C) $336,294.25
D) $347,901.57

Question 33

You have taken out a $100,000, one-year ARM. The teaser rate in the first year is 4.5% (annual). The index interest rate after the first year is 3.25% and the margin is 2.75%. (Note: the term on this ARM is 30 years). There is also a periodic (annual) rate cap of 1.00%. Given this information, determine the monthly mortgage payment you would be scheduled to make in month 13 of the mortgage loan's term.

A) $321.64
B) $506.69
C) $566.26
D) $597.21

Question 34

Given the following information, calculate the Effective Borrowing Cost (EBC). Loan amount: $175,000, Term: 30 years, Interest rate: 7 %, Payment: $1,164.28, Discount points: 1 point, Origination fee: $3,250. Assume the loan is held until the end of year 10.

A) 0.6%
B) 3.8%
C) 7.0%
D) 7.4%

Question 35

Suppose you have taken out a $400,000 fully-amortizing fixed rate mortgage loan that has a term of 15 years and an interest rate of 3.75%. In month 1 of the mortgage, how much of the monthly mortgage payment does the interest portion consist of?

A) $9.09
B) $1,250.00
C) $1658.89
D) $2,908.89

Question 36

You have taken out a $300,000, one-year ARM. The teaser rate in the first year is 5.5% (annual). The index interest rate after the first year is 4.00% and the margin is 2.25%. (Note: the term on this ARM is 30 years). There is also a periodic (annual) rate cap of 1.00%. Given this information, determine the monthly mortgage payment you would be scheduled to make in month 13 of the mortgage loan's term.

A) $980.08
B) $1,703.37
C) $1,843.88
D) $1,891.81

Question 37

You have taken out a $300,000, 5/1 ARM. The initial rate of 5.4% (annual) is locked in for 5 years. Calculate the payment after recasting the loan (i.e., after the reset) assuming the interest rate after the initial lock period is 8.0%. (Note: the term on this 5/1 ARM is 30 years)

A) $1,684.59
B) $1,784.79
C) $1,887.75
D) $2,138.02

Question 38

Given the following information on a 30-year fixed-payment fully-amortizing loan, determine the owner's equity in the property after 7 years if the market value of the property is $240,000 at the end of year 7. Interest Rate: 7%, Monthly Payment: $1,200.

A) $15,967.33
B) $59,630.92
C) $75,598.25
D) $164,401.75