CH 15

A balloon payment is required at the end of the loan term.

A characteristic of a partially amortized loan is: No loan balance exists at the end of the loan term. A balloon payment is required at the end of the loan term. All have adjustable interest rates. All have a loan term of 15 years. None of the above.

Level-payment mortgage (LPM)

A fully amortizing loan with equal periodic payments.

monthly loan constant

A loan payment factor used to determine payments on a level payment, fixed rate loan.

interest-only mortgage

A mortgage loan that is interest only for its full term and then must be refinanced or paid off in full.

An inflation index.

Adjustable rate mortgages commonly have all the following except: A teaser rate. A margin. An index. A periodic interest rate cap. An inflation index.

If the 6.25 percent, 15-year, $125,000 loan is prepaid at the end of four years, and if total up-front costs to the borrower are $6,000, then the EBC is 7.77 percent (N = 48; I = ?; PV = 119,000; PMT = 1,071.7786; and FV = 102,123.28). Note: 7.77 = 0.6478 × 12.

Find the EBC for this loan: $125,000, 15 years, 6.25 percent, monthly payments, lender points and origination fee: $2,500, plus other up-front costs of $3,500. Assume prepayment at the end of four years.

The EBC on the 6.25 percent, 15-year $125,000 loan, assuming no prepayment and total up-front costs to the borrower of $2,500 in points and origination fee plus $3,500 in other up-front costs, is 7.03 percent (N = 180; I = ?; PV = 119,000; PMT = 1,071.7786; and FV = 0). Note: 7.03 = 0.58605 × 12.

Find the EBC for this mortgage: $125,000 loan amount, 15 years, monthly payments, 6.25 percent annual interest rate, lender "points" and origination fee: $2,500, plus other up-front costs of $3,500 paid by the borrower to third parties. Assume no prepayment.

The balance after six years on the 6.25 percent, 15-year $125,000 loan is $88,359.45 (N = 108; I = 6.25/12; PV = ?; PMT = 1,071.7786; and FV = 0).

Find the balance on this mortgage at the end of six years: $125,000 loan amount, 15 years, monthly payments, 6.25 percent annual interest rate.

The balance at the end of seven years on a 6.5 percent, 30-year, $100,000 loan would be $90,416.25. [Solution: Payment is equal to $632.068 (N = 360; I = 6.5/12; PV = 100,000; PMT = ?; FV = 0). Thus, the loan balance at end of year 7 is $90,416.25 (N = 276; I = 6.5/12; PV = ?; PMT = 632.068; FV = 0).]

Find the balloon payment on this mortgage loan: $100,000, 6.5 percent annual interest rate, monthly payments, 30-year amortization, but 7-year term to maturity.

If the 6.25 percent, 15-year, $125,000 loan is prepaid at the end of four years, and if points and origination fees sum to $2,500, the lender's yield is 6.87 percent. Balance of loan after four years is $102,123.28 (N = 132; I = 6.25/12; PV = ?; PMT = 1,071.7786; and FV = 0). Thus, the lender's yield is 6.87 percent (N = 48; I = ?; PV = −122,500; PMT = 1,071.7786; and FV = 102,123.28). Note: 6.87 = 0.5729 × 12.

Find the lender's yield for this loan: $125,000, 15 years, 6.25 percent annual rate, monthly payments, lender "points" and origination fee: $2,500. (Assume prepayment after four years.)

The lender's yield on the 6.25 percent, 15-year $125,000 loan, assuming no prepayment and assuming the lender charges $2,500 in discount points, is 6.57 percent (N = 180; I = ?; PV = −122,500; PMT = 1,071.7786; and FV = 0). Note: 6.75 = 0.5474 × 12.

Find the lender's yield for this mortgage: $125,000 loan amount, 15 years, monthly payments, 6.25 percent, and lender "points" equal to $2,500. Assume no prepayment.

The monthly payment for a loan of $125,000, 15 years, and 6.25 percent is $1,071.78 (N = 180; I = 6.25/12; PV = 125,000; PMT = ?; and FV = 0).

Find the monthly payment on this loan: $125,000, 15 years, 6.25 percent annual interest rate.

For the uncapped ARM, the balance at the end of year 2 is $72,616.39. The initial payment, at 4 percent, is $358.06. The payment in year 2, at 5.5 percent, is $424.05. [Solution: First year payment is $358.0615. (N = 360; I = 4.0/12; PV = 75,000; PMT = ?; FV = 0). Thus, the loan balance at the end of year 1 is $73,679.22 (N = 348; I = 4.0/12; PV = ?; PMT = 358.0615; FV = 0). The interest rate in year 2 is 5.5 percent (2.75% index plus 2.75% margin). Thus, the payment in year 2 is $424.0549 (N = 348; I = 5.5/12; PV = 73,679.22; PMT = ?; FV = 0) and the loan balance at the end of year 2 is $72,616.39 (N = 336; I = 5.5/12; PV = ?; PMT = 424.0549; FV = 0).]

Given the following information for a 30-year $75,000 uncapped ARM loan, find the loan balance at the end of year 2: Margin, 2.75 percent; index for year 1, 2.50 percent; Index for year 2, 2.75 percent; teaser, 4.00 percent.

For the capped ARM, the balance at the end of year 2 is $72,519.46. The initial payment, at 4 percent, is $358.06. The payment in year 2, at 5 percent, is $401.45. [Solution: From Concept Check 12, we know the loan balance at the end of year 1 is 73,679.22. If the ARM was uncapped, the interest rate in year 2 would rise to 5.5 percent. However, the periodic cap of 1 percent will allow the interest rate to rise only to 5.00 percent (4.00 + 1.00). Thus, the payment in year 2 is $401.4488 (N = 348; I = 5.0/12; PV = 73,679.22; PMT = ?; FV = 0). Thus, the balance at the end of year 2 is $72,519.45 (N = 336; I = 5.0/12; PV = ?; PMT = 401.4488; FV = 0.]

Given the following information for a 30-year, $75,000 capped ARM loan, find the interest rate and ending balance for year 2: Margin, 2.75 percent, index for year 1, 2.50 percent; Index for year 2, 2.75 percent; teaser, 4.00 percent; periodic cap, 1.00 percent, overall cap, 5.00 percent. Assume that the cap applies to the teaser rate.

An interest-only mortgage.

If a mortgage is to mature (i.e., become due) at a certain future time without any reduction in the original principal balance, this is called: A second mortgage. An amortized mortgage. A limited reduction mortgage. An interest-only mortgage. An open-end mortgage.

EBC accounts for additional third-party up-front expenses paid by the borrower that lender's yield does not account for.

Lender's yield differs from effective borrowing cost (EBC) because: Lender's yield is strictly a yield to loan maturity and EBC is not. EBC is strictly a yield to maturity and lender's yield is not. EBC accounts for additional third-party up-front expenses paid by the borrower that lender's yield does not account for. Lender's yield accounts for additional third-party up-front expenses that EBC does not.

Early payment mortgages

Loans where the borrower makes additional payments to reduce outstanding principal more quickly than scheduled.

An up-front expense in purchasing a house that should not be included in computing EBC is buyer's title insurance.

Name an up-front expense in purchasing a home that should not be used in computing EBC for the loan involved.

Five important measures that are important to mortgage loan analytics are (1) loan payment, (2) loan balance (at any time in the life of the loan), (3) lender's yield, (4) effective borrowing cost, and (5) present value.

Name five important quantities or measures that are important to mortgage loan analytics.

N=144, I/Y=9/12, PMT=1000, FV=0, CPT PV = ? = $87,871.

On a level-payment loan with 12 years (144 payments) remaining, at an interest rate of 9 percent, and with a payment of $1,000, the current balance is: $144,000. $100,000. $87,871. $76,137.

N=180, I/Y=7/12, PV=-100000, FV=0, CPT PMT=?=898.83 Balance of loan after 6 years(72 pmts): N=180-72=108, CPT PV=?=71870.17; FV=71870.17, N=72, CPT I/Y, I/Y*12= 8.7 percent ((**The PV here would be -[100000-100000*.07] =93000))

On the following loan, what is the best estimate of the effective borrowing cost if the loan is prepaid six years after origination? Loan amount: $100,000 Interest rate:7 percent Term:180 months Up-front costs:7 percent of the loan amount 8.2 percent. 8.4 percent. 8.5 percent. 8.7 percent. 9.0 percent.

closing costs

Sometimes called settlement costs, costs in addition to the price of a property, usually including mortgage origination fee, title insurance, attorney's fee, and prepayable items such as taxes and insurance payments collected in advance at closing and held in an escrow account until needed.

Fixed-payment, fully amortized mortgage.

The dominant loan type originated by most financial institutions is the: Fixed-payment, fully amortized mortgage. Adjustable rate mortgage. Purchase-money mortgage. FHA-insured mortgage.

Lender's Yield

The implied discount rate, or internal rate of return, on a loan—given all of the cash inflows and outflows on the loan to the lender.

One year.

The most common adjustment interval on an adjustable rate mortgage (ARM) once the interest rate begins to change has been: Six months. One year. Three years. Ten years. None of the above.

adjustment period

The number of initial years in which an ARM remains fixed before the interest rate is allowed to be adjusted.

Loan balance

The outstanding principal balance on a loan. Will always be equal to the original balance if the loan is an interest-only loan. Declines over time if the loan is self-amortizing.

The Truth-in-Lending Act of 1968.

The required calculation of annual percentage rate (APR) by the lender is a result of: The Truth-in-Lending Act of 1968. The Real Estate Settlement Procedures Act of 1974/1977. The Equal Credit Opportunity Act of 1974. State real estate licensing laws. Rules of the Federal Trade Commission.

Under financially unconstrained circumstances, a homebuyer is likely indifferent between 15-year and 30-year loans at the same interest rate of 7 percent, because both have the same present value (cost).

Under financially unconstrained circumstances, which of these monthly fixed-rate mortgage loans would a borrower prefer, and why? 15-year, 7 percent or 30-year, 7 percent. Assume no up-front financing costs. Explain your answer.

Discount Points

Upfront financing costs charged by lenders to increase the yield on a loan.

In computing APR, it is assumed the loan remains outstanding to maturity (no prepayment).

What assumption about prepayment is made in computing the annual percentage rate (APR)?

Assuming they can afford the payments on both mortgages, borrowers usually should choose a 30-year mortgage over an otherwise identical 15-year loan if their discount rate (opportunity cost) exceeds the mortgage rate.

Which of the following statements is true about 15- and 30-year fixed-payment mortgages? Thirty-year mortgages are more popular than 15-year mortgages among homeowners who are refinancing. Borrowers pay more total interest over the life of a 15-year mortgage than on a 30-year loan, all else being equal. The remaining balance on a 30-year loan declines more quickly than an otherwise equivalent 15-year mortgage. Assuming they can afford the payments on both mortgages, borrowers usually should choose a 30-year mortgage over an otherwise identical 15-year loan if their discount rate (opportunity cost) exceeds the mortgage rate.

Annual Percentage Rate (APR)

an approximation of the mortgage loan's annual effective borrowing cost in the absence of early payoff. This measure includes the effect of up-front financing costs on the true cost of borrowing

effective borrowing cost

the true borrowing cost, including the effect of all up-front financing costs. Is similar to the annual percentage rate but allows for the effect of early payoff.