Deck 6: Alternative Mortgage Instruments

Question 1

The longer the adjustment period on an ARM:

A) the lower the value of the ARM to the lender
B) the higher the value of the ARM to the lender
C) has no effect on the value of the ARM
D) the higher the risk to the borrower

Answer 1

the lower the value of the ARM to the lender

Question 2

A 30 year,monthly payment ARM has the following characteristics: loan amount = $135,000,index value = 5.00%,margin = 2.50,discount points = 2,teaser rate = 6%.The payment for year one is:

A) $724.71
B) $793.21
C) $809.39
D) $925.06
E) $943.94

Answer 2

$809.39

Question 3

The initial monthly payment on an adjustable rate mortgage with a balance of $100,000,an interest rate of 8.5% annually and a term of 30 years will be:

A) $3,711.78
B) $733.76
C) $768.91
D) $3,688.83

Answer 3

$768.91

Question 4

The longer the time between rate adjustments on an adjustable rate mortgage:

A) the less risk assumed by the lender
B) the less probability of prepayment
C) the more risk assumed by the lender
D) the greater the fluctuation in the rate on the loan

Question 5

With an index rate of 8.5%,a 200 basis point margin and a life of loan cap of 5%,a fully indexed rate on an ARM is:

A) 6.5%
B) 17%
C) 10.5%
D) 13.5%

Question 6

When there is an increase in the loan balance due to payments less than the interest charge on an adjustable rate mortgage,the result will be:

A) negative amortization
B) interest rate volatility
C) payment in full of the entire loan balance
D) a foreclosure

Question 7

Maintaining a certain value of an adjustable rate mortgage by trading off caps and discount points can be referred to as:

A) frequency of rate change
B) historical replication
C) terminal wealth preservation
D) pricing ARM terms

Question 8

The alternative mortgage instrument that has the least amount of interest rate risk for the lender is:

A) FRM
B) GPM
C) ARM
D) SAM

Question 9

A Price Level Adjusted Mortgage (PLAM)

A) does not involve negative amortization
B) is very easy for the average borrower to understand
C) solves the problem of the tilt effect and interest rate risk
D) solves maturity mismatch problem of the lender

Question 10

With a Reverse Annuity Mortgage:

A) the borrower receives monthly payments and makes a large repayment at the end of the mortgage term
B) the loan amount greatly exceeds the value of the house
C) the payments are designed for young couples purchasing their first house
D) the rate is adjusted every six months

Question 11

A reason not to refinance a loan is:

A) a decline in the market rate of interest
B) a higher level of income for the borrower
C) a desire to take some equity out of the property
D) to improve the amount of cash flows from an investment property

Question 12

Today's mortgage market is dominated by:

A) FRMs and ARMs
B) FRMs and PLAM
C) SAMs and ARMs
D) PLAMs and SAMs

Question 13

The tilt problem causes the real payment on a fixed rate mortgage to be:

A) high at the beginning and low at the end
B) low at the beginning and high at the end
C) high at the beginning and end and low in the middle d low at the beginning and end and high in the middle

Question 14

The index on an adjustable rate mortgage must be:

A) an established index
B) acceptable to the borrower
C) not under the control of the lender
D) all of the above
E) a and b

Question 15

The following is not an alternative mortgage instrument:

A) SAM
B) RAM
C) HFR
D) FLIP

Question 16

The following is NOT characteristic of an adjustable rate mortgage

A) it has a lower initial interest rate than a fixed rate mortgage
B) it has lower risk for the borrower than do fixed rate mortgages
C) it has a limit on the amount the rate can change from period to period
D) it has a rate that is tied to an index rate

Question 17

The following is NOT a characteristic of a graduated payment mortgage:

A) it alleviates the tilt affect
B) payments are higher at the beginning and lower at the end
C) the interest rate does not change
D) negative amortization may occur at some stages of the loan term

Question 18

The main advantage of a Pledged Account Mortgage for the borrower is:

A) the lower interest rate
B) the lower required down payment
C) the lower total finance charge
D) the lower initial payment and affordability

Question 19

An ARM has the following characteristics at the outset: index value = 5%,margin = 2.75,teaser rate = 5.50%.The contract interest rate for the first year is:

A) 5%
B) 5.50%
C) 7.75%
D) cannot be determined

Question 20

The following is NOT true of a Shared Appreciation Mortgage:

A) there are annual adjustments to the contract rate
B) there is the risk that property values may not increase as fast as general inflation
C) the borrower may not have an incentive to maintain the property d . the contract rate is generally lower than on a standard fixed rate loan

Question 21

A PLAM has the following terms: loan amount: $128,000,real interest rate: 5.50%, 30-year term,2.50 discount points,monthly payment in year one is $726.77 and monthly payment in year two is $704.97,observed inflation EOY2: 4%,observed inflation EOY3 through EOY30: 0%.What is the APR of this loan?

A) 5.24%
B) 5.47%
C) 5.55%
D) 5.66%
E) 5.78%

Question 22

A PLAM has the following terms: loan amount: $140,000,real interest rate: 5.50%, 30-year term,2.50 discount points,annual payments adjustments,monthly payments,observed inflation EOY1: 3%.What is the monthly payment for the first year?

A) $1076.47
B) $794.90
C) $775.03
D) $553.17
E) $826.81

Question 23

An ARM with 2/6 interest rate caps and a 2.50 margin has a contract rate of 5% for the first year.At the end of year one index value is 4.00%.The contract rate for year two is:

A) 4%
B) 6%
C) 6.50%
D) 7%
E) cannot be determined

Question 24

A PLAM has the following terms: loan amount: $118,000,real interest rate: 5.50%, 30-year term,2.50 discount points,annual payment adjustments,monthly payments.The payment in year two is $649.89 and the observed inflation at EOY1 is 2% and EOY2 is 4%.If the loan is repaid at the EOY2,what is the balance?

A) $111,289
B) $115,741
C) $113,515
D) $119,038
E) cannot be determined

Question 25

Your ARM contract is $110,000,monthly payments for 30 years.Your contract rates are 4.50% and 6%,respectively,for the first two years.What is your payment for year two?

A) $557.35
B) $656.93
C) $648.86
D) cannot be determined

Question 26

Suppose you have a 30-year ARM with a balance at the EOY2 of $139,632 and a monthly payment for year 3 of $1239.88.If the margin is 2.50,what is the value of the index to produce this payment?

A) 10.00%
B) 7.50%
C) 12.50%
D) 7.64%
E) cannot be determined

Question 27

A PLAM has the following terms: loan amount: $128,000,real interest rate: 5.50%, 30-year term,2.50 discount points,annual payments adjustments,monthly payments,observed inflation EOY1: -3%,observed inflation EOY2: 4%.What is the monthly payment for the second year?

A) $510.52
B) $714.59
C) $715.28
D) $704.97
E) $733.16

Question 28

Your grandfather takes a reverse annuity mortgage on his house for $135,000 at 7.00% for five years.His payments are an equal annual annuity of $21,939.If he decides to repay the loan at the end of year three,what amount is owed?

A) $54,247
B) $59,529
C) $75,469
D) $104,678
E) $107,507

Question 29

An ARM with 2/6 interest rate caps and a 2.75 margin has a current contract rate of 9%. It's adjustment time and the index value is 4%.The next year's contract rate is:

A) 4%
B) 6%
C) 6.75%
D) 7%
E) cannot be determined

Question 30

Your grandmother takes a reverse annuity mortgage on her house for $160,000 at 7.00% for five years.Her payments will be an equal annual annuity of $26,002.How much interest does she pay over the term of the loan?

A) $21,918
B) $20,887
C) $29,988
D) $34,399
E) $42,171

Question 31

Suppose you have a 30-year ARM with an original loan balance of $125,000,monthly payment in year one of $874.02 and monthly payment in year two of $1003.36,and a contract rate in year two of 9%.If the loan is repaid at the end of year two,what amount of discount points should the lender have charged to earn an effective yield of 10.17%?

A) 2.85 points
B) 3.51 points
C) 3.75 points
D) 8.22 points
E) 9.18 points

Question 32

Your grandfather takes a reverse annuity mortgage on his house for $165,000 at 7.50% for five years.His payments will be an equal annual annuity.What annual payment will he receive?

A) $2,116
B) $26,425
C) $28,407
D) $37,937
E) $40,782

Question 33

A PLAM has the following terms: loan amount: $118,000,real interest rate: 5.50%, 30-year term,2.50 discount points,annual payment adjustments,monthly payments.The payment in year one is $669.99 and the payment in year two is $649.89.What is the inflation rate at the end of year two?

A) -3%
B) 4%
C) 0%
D) 5.50%
E) cannot be determined from the information given

Question 34

Your ARM payment in year one is $671.03.The ARM is a 30 year term with a beginning rate of 5%.In year two your contract rate moves to 7% and your payment is $827.77.How much did you originally borrow?

A) $17,037
B) $122,609
C) $ 125,000
D) $152,367
E) cannot be determined

Question 35

A PLAM has the following terms: loan amount: $140,000,real interest rate: 5.50%, 30-year term,2.50 discount points,annual payments adjustments,monthly payments of $794.90 in year one and $818.75 in year two,and observed inflation EOY2: -4%.If the loan is repaid at the end of year two,what is the effective cost?

A) 6.28%
B) 6.43%
C) 6.98%
D) 8.34%
E) cannot be determined

Question 36

Your ARM contract is $100,000,monthly payments for 30 years.Your contract rates are 4.50% and 6%,respectively,for the first two years.What is the balance of the loan at the end of year two?

A) $95,709
B) $96,699
C) $97,088
D) $98,387
E) cannot be determined