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Question 1

Which one of the following is more likely to be TRUE about Prepayment penalties:

a) They are often used with residential mortgages

b) They lower the effective cost if the loan is repaid before maturity

c) They are exactly the same as charging additional discount points for the loan

d) They are not included in the APR calculation

A borrower takes out a 30-year, fully amortizing mortgage loan for $250,000 with an interest rate of 5%. What would the monthly payment be?

a) $694

b) $1,042

c) $1,342

d) $1,355

Which of the following is less likely to be a determinant of interest rates for single family residential mortgages?

a) The demand and supply of mortgage funds

b) Inflation expectations

c) Prepayment risk

d) The demand and supply of retail properties

A borrower takes out a 30-year, fully amortizing mortgage loan for $100,000 with an interest rate of 6% plus 4 discount points. What is the effective annual interest rate on the loan approximately if the loan is carried for all 30 years?

a) 5.6%

b) 6.0%

c) 6.4%

d) 6.6%

A borrower has a 30-year, fully amortizing mortgage loan for $200,000 with an interest rate of 6% and monthly payments. If she wants to pay off the loan after 8 years, what would be the outstanding balance on the loan?

a) $84,886

b) $91,246

c) $146,667

d) $175,545

One of the most popular amortizing mortgages today is the constant payment mortgage. Which of the following characterizes the components of the CPM payment over the life of the loan?

A borrower takes out a "hybrid mortgage loan" for $200,000 with monthly payments. This loan combines elements of fixed-rate mortgage (FRMs) for a period of 2 years, after which interest rates are reset and the loan becomes an adjustable mortgage (ARM). The amortization period is 30 years. The first two years of the loan have a “teaser” rate of 4%. After that, the interest rate can reset with a 2% annual interest rate cap. Assume that on the reset date, the composite rate (i.e., the market index plus the margin) is 7%. What would the Year 3 monthly payment be?

a) $955

b) $1,067

c) $1,071

d) $1,186

Given that all other factors are equal, which of the following ARMs will have the lowest expected interest rate?

a) An ARM with payment caps and negative amortization

b) An ARM with interest rate caps

c) An ARM with longer Adjustment interval

d) An ARM with no caps or limitations

Under which scenario is negative amortization most likely to occur for an ARM?

PAYMENT Cap Interest Rate s

A)None increasing

B)None Decreasing

C)7.5% Increasing

D)7.5% Decreasing

Which of the following descriptions most accurately reflects the risk position of an ARM lender in comparison to that of a FRM lender?

Interest Rate Risk De fault Risk

A)Higher Higher

B)Lower Lower

C)Higher Lower

D)Lower Higher

LOAN 1 LOAN 2 LOAN 3 LOAN 4

Initial Interest Rate ? ? ? ?

Loan Maturity (yrs) 20 20 20 20

%Margin above Index 3% - 3% 3%

Adjustment Interval 1 yr. - 1yr. 1yr.

Points 1% 1% 1% 1%

Interest Rate Cap None - 1%/yr. 1%/yr.

IfncinRiho;ii

With which loan in the above table does the lender have the lowest interest rate risk?

Tom wants to purchase a property for $300,000. He can borrow a 80% LTV fixed-rate loan, with 4.5% annual interest rate and a 3% origination fee. Or, he can borrow a 90% LTV fixed-rate loan, with 5.5% annual interest rate, and a 3% origination fee. Both loans have a 30 year amortization period. If he plans to prepay the loan at the end of 3rd year, what will be the incremental cost of borrowing for him to to borrow the additional 10% loan amount?

Sharon borrows an adjustable rate loan (ARM) of $100,000 with 3 year loan maturity. The initial interest rate for the loan is 8.5%, the margin is 3%, the loan amortization period is 15 years, the frequency of adjustment is 1 year (monthly compounding), no interest rate cap or payment cap. There will be a discount point of 3% for the loan. Also, the index rates for the next 2 years are 11% and 8%, respectively. What will be the effective mortgage yield for borrowing this loan?

Sharon borrows an adjustable rate loan (ARM) of $100,000 with 3 year loan maturity. The initial interest rate for the loan is 8.5%, the margin is 3%, the loan amortization period is 15 years, the frequency of adjustment is 1 year (monthly compounding). There will be a discount point of 3% for the loan. Also, the index rates for the next 2 years are 11% and 8%, respectively. NOW suppose there is an annual interest rate cap of 2% specified in the loan contract, what will be the effective mortgage yield for borrowing this loan? Assume that no negative amortization is allowed.

The market value of a loan is:

a) The loan balance times one minus the market rate

b) The loan balance times one minus the original rate

c) The future value of the remaining payments

d) The present value of the remaining payments

Luis took a fixed-rate mortgage loan 5 years ago for $120,000 at 7% interest rate. The loan maturity is 15 years and the amortization period is also 15 years. Now, a new lender offers him a loan at 5% interest rate with loan maturity of 10 years. The new loan amount is $92,895, which is exactly the outstanding loan balance of the existing loan. The amortization period for the new loan is also 10 years. If Luis refinances the existing loan, a prepayment penalty of 3% will be applied. Also, the new loan has a loan fee of $3,000. If Luis plans to hold the new loan for 10 years and he has to pay the refinancing fees out of his pocket, what is the effective interest rate for the new loan?

6.41%

6.62%

6.26%

6.12%

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

a) It should be less than the rate for a first mortgage

b) It should be compared to the cost of obtaining a second mortgage

c) It is used to calculate the APR for the loan

d) It is independent of loan-to-value ratio

Peter took a fixed-rate, fully amortizing mortgage loan for a 5% interest rate for 10 years (monthly compounding loan), with the loan amount being $90,000. The lender allows him to pay $200 monthly payments for the first three year. Assume negative amortization is allowed. What will be the accrued interest or the amount of increased loan balance for the loan three years later from now?

Suppose you can get a loan with a below-market interest rate from a home builder. The fully amortizing FRM loan has 4% interest rate, 30 year amortization, $240,000 loan amount. If the home usually sells for $300,000, at what price should the homebuilder sell the home to you in order to earn a market return of 4.5% on the loan? Assume you will hold the loan for 30 years.

Payment to income ratio is BEST described as:

a) The factor used to determine if interest on mortgage loans is tax deductible

b) The only measure of a borrowers ability to fulfill his or her loan obligations

c) The ratio of the estimated rental income to the expected payments on a rental property

d) The ratio of the expected payments on a property to the income of the borrower

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