Deck 4: The Early History of Residential Finance and Creation of the Fixed Rate Mortgage

Question 1

You need a 30-year FRM and have two choices.Option one is 6.50% contract rate with 2.50 discount points and an APR of 6.75%.Option two is 6.75% contract rate with no discount points.Neither loan has any other financing fees.If you plan to hold the loan for five years,which is the better option to minimize your effective borrowing costs?

A) 6.50% with 2.50 points
B) 6.75% with no points
C) doesn't matter,the effective cost is the same
D) can't determine without knowing the loan amount

Answer 1

6.75% with no points

Question 2

The ability of a borrower in any state to redeem his or her property after a period of delinquency is called:

A) a statutory right of redemption
B) an equitable right of redemption
C) a legal right of redemption
D) none of the above

Answer 2

an equitable right of redemption

Question 3

The effective interest charge on a loan will be effected by:

A) the APR
B) discount points
C) appraisal costs
D) none of the above

Answer 3

none of the above

Question 4

A discount point is:

A) one percent of the original loan balance
B) determined only at the loan closing
C) the same as the origination fee
D) none of the above

Question 5

Suppose you take an FRM of $150,000 at 7.5% for 30 years.If you repay the mortgage at the end of year four,how much total interest did you pay?

A) $6,209
B) $44,134
C) $50,343
D) $227,575
E) cannot be determined

Question 6

While reviewing the documents on your new mortgage you discover that the APR is greater than the contract interest rate even though you paid no discount points.How can this happen?

A) the lender made a mistake,the rates should be equal
B) the market rate increased just before the loan was signed and the lender adjusted for that
C) you paid financing fees other than discount points
D) the contract rate does not account for monthly compounding
E) the lender made a mistake,the contract rate is always greater than the APR

Question 7

A prepayment penalty in a mortgage has the effect of ________ the APR.

A) increasing
B) decreasing
C) doesn't affect
D) cannot determine the effect

Question 8

Your monthly payment on a $125,000 fixed-rate mortgage at 8% for 30 years is:

A) $917.21
B) $925.28
C) $4611.04
D) $1,000
E) cannot be determined

Question 9

Suppose your FRM monthly payment is $1048.82 with terms of 7.5% for 30 years.How much did you originally borrow?

A) $377,575
B) $150,000
C) $376,575
D) $1,413,228
E) cannot be determined

Question 10

The mortgage constant (MC)factor calculates the payment per dollar borrowed. The numerator of the MC factor is (i)(1 + i)ⁿ.The denominator of the MC factor is:

A) (1 + i)ⁿ
B) (1 + i)ⁿ - 1
C) iⁿ
D) i
E) there is no denominator

Question 11

In Roman law the an instrument used to secure a loan was called a fiducia,which means:

A) public
B) trust
C) finance
D) secrecy

Question 12

Suppose you take an FRM of $150,000 at 7.5% for 30 years.If you repay this mortgage at the end of year five,what is the outstanding balance?

A) $52,342
B) $87,071
C) $141,574
D) $141,926
E) none of the above

Question 13

Suppose you take an FRM of $150,000 at 7.5% for 30 years.What is the breakdown of interest and principal for the payment in month 240?

A) $1048.82 interest,$0 principal
B) $0 interest,$1048.82 principal
C) $493.50 interest,$555.32 principal
D) $555.32 interest,$493.50 principal
E) cannot be determined

Question 14

Under a normal upward sloping yield curve scenario,fifteen year fixed-rate mortgages should be priced _________ thirty-year fixed-rate mortgages.

A) equal to
B) less than
C) greater than
D) there is no relationship to the yield curve

Question 15

The annual percentage rate (APR)on a mortgage is:

A) the contract rate as established by the lender
B) the effective yield taking into account discount points
C) the rate for the first year only
D) the monthly rate multiplied by twelve

Question 16

The Federal Deposit Insurance Corporation was enacted to insure:

A) FHA loans
B) conventional loans
C) savings accounts at depository institutions
D) the solvency of pension plans

Question 17

The Truth-in-Lending law:

A) requires the lender disclose the APR on a mortgage loan
B) requires the lender disclose the total finance charges on a mortgage loan
C) provides for penalties for failure to accurately disclose the APR
D) all of the above

Question 18

The Federal National Mortgage Association was formed in part to:

A) buy and sell VA mortgages
B) buy and sell FHA mortgages
C) buy and sell conventional mortgages
D) none of the above

Question 19

The amortization schedule of a mortgage shows:

A) that the principal balance declines with each payment
B) that the interest portion of the payment declines with each payment
C) that the portion of the payment representing payment of principal increases with each payment
D) all of the above

Question 20

Suppose you take an FRM of $150,000 at 7.5% for 30 years.How much of the payment is interest in month 72?

A) $173.26
B) $937.50
C) $875.56
D) $65,432
E) none of the above

Question 21

You need a 30-year fixed-rate mortgage for $100,000,monthly payments.One lender offers 7.5% with no discount points while another lender offers 7.125% with some points.What amount of points on the second loan would give the loans the same APR?

A) no points necessary - the 30-year amortization will force the APRs to be equal
B) 3.65 points
C) 3.75 points
D) with different contracts rates these loans cannot have the same APR

Question 22

A 30-year fixed-rate mortgage has a contract rate of 7.00% with one point.A 15- year fixed-rate mortgage has a contract rate of 6.25%.If both loans have a 15-year holding period,what amount of points on the 15-year loan will equalize the effective costs of these loans over their holding periods? Assume a loan amount of
$80,000.

A) the effective costs cannot be equal because of the different loan amortizations
B) 5.20 points
C) 5.31 points
D) 5.56 points
E) none of the above

Question 23

You take a fixed-rate mortgage for $130,000 at 6.75% for 30 years,monthly payments.At the end of year two,you unexpectedly inherit $15,000 from your now-favorite grandmother.You decide to apply this $15,000 to the principal balance of your loan.How much interest do you save over the life of the loan by doing this assuming that the mortgage is held to maturity?

A) $76,089
B) $96,325
C) $61,089
D) $79,637
E) none of the above

Question 24

Lenders are offering different financing options on 30-year FRMs.One lender offers a contract rate of 6% with one discount point while another lender offers a 6% contract rate with two discount points.Since both loans are discounted,which is the better option for the borrower based on the APR? Other factors are held constant and the borrower wants to minimize his/her borrowing cost.

A) 6% with one point
B) 6% with two points
C) can't determine without the loan amount
D) discounting doesn't matter,the APRs will be the same since the contract rates are the same

Question 25

You have just taken a $110,000 FRM at 8% for 30 years,monthly payments.You know that your APR is 8.214% but you cannot remember how many discount points you paid.If you had $550 in financing fees other than discount points,the points you paid were:

A) $2,200 or 2 points
B) $2,245 or 2.04 points
C) $1,650 or 1.50 points
D) $1,695 or 1.54 points
E) none of the above

Question 26

A lender offers you a fixed-rate mortgage for $145,000 at 6% for 30 years,monthly payments,with 2.625 discount points.What is the APR for this loan?

A) 6.17%
B) 9.75%
C) 6.25%
D) 8.625%
E) none of the above

Question 27

A lender gives you a $125,000 thirty-year fixed-rate mortgage at 6.75%,three discount points,monthly payments.Suppose that,before you make any payments,you receive a pay raise so you pay an extra $100 per month in addition to your normal payment.Also,at the end of year five of the mortgage you have an unexpected job transfer thus the house is sold and the mortgage is repaid.The mortgage balance at the end of year five with the extra $100 per month payment is $110,231.What is the effective cost of the loan for the five-year holding period?

A) 7.45%
B) 7.93%
C) 5.74%
D) 7.51%
E) none of the above

Question 28

A lender offers you a fixed-rate mortgage for $145,000 at 6.25% for 30 years, monthly payments,with 0.75 discount points.If you repay the loan balance at the end of year four,what is the effective cost of the loan?

A) 6.32%
B) 6.47%
C) 7.00%
D) 6.25%
E) none of the above

Question 29

You take a fixed-rate mortgage for $132,000 at 6.75% for 30 years,monthly payments.At the end of the second year,you unexpectedly inherit $18,000 from your now-favorite uncle.You decide to apply this $18,000 to the principal balance of your loan.How many payments are remaining after the extra lump sum payment is made?

A) 233.33
B) 126.67
C) 121.15
D) 272.00
E) none of the above

Question 30

You take a fixed-rate mortgage for $120,000 at 6.25% for 30 years,monthly payments.At the end of the second year,you unexpectedly inherit $16,000 from your now-favorite aunt.You decide to apply this $16,000 to the principal balance of your loan.What is the balance of the mortgage at the end of year two
After the extra payment?

A) $103,772
B) $117,097
C) $86,095
D) $101,097
E) none of the above

Question 31

You wish to purchase real property.The lender will give you a $145,000 fixed?-rate,thirty?year mortgage at 7.50%,three discount points,monthly payments.Suppose that,before you make any payments,you receive a pay raise so you pay an extra $100 per month with your normal payment.How many payments are required to fully amortize the loan assuming the extra $100 is paid each month?

A) 360
B) 269.63
C) 209.63
D) 130.18
E) none of the above