Ch. 5 Real Estate Investments

A borrower takes out a 30-year adjustable rate mortgage loan for $200,000 with monthly payments. The first two years of the loan have a "teaser" rate of 4%, after that, the rate can reset with a 5% annual payment cap. On the reset date, the composite rate is 6%. What would the Year 3 monthly payment be?

1,003

A borrower takes out a 30-year adjustable rate mortgage loan for $200,000 with monthly payments. The first two years of the loan have a "teaser" rate of 4%, after that, the rate can reset with a 2% annual rate cap. On the reset date, the composite rate is 5%. What would the Year 3 monthly payment be?

1,067

Assume that the loan in the previous question allowed for negative amortization. What would be the outstanding balance on the loan at the end of Year 3?

192,337

Under which scenario is negative amortization likely to occur?

7.5, increasing

Which is NOT a component of an ARM?

A chapter

Which of the following clauses leads to higher risk for an ARMs lender?

Adjustment interval is longer than one year

Given that every other factor is equal, which of the following ARMs will have the lowest expected cost?

An ARM with no caps or limitations

In order to calculate the APR for an ARM, you must,

Assume the worst case scenario and use interest rates at their highest possible point over the life of the loan

If an ARM index increased 15%, the negative amortization on a loan with a 5% annual payment cap is calculated by:

Compounding the difference between the payment as if no cap existed and the 5% capped payments

The expected cost of borrowing does NOT depend on which of the following provisions?

None of the above

Which of the following statements regarding negative amortization in the previous question is true?

The Year 3 payments are more than the interest assessed on the loan, so the outstanding balance at the end of Year 3 is lower than at the end of Year 2.

If one of the terms of an ARM read, interest is capped at 2%/5%, what would that mean?

The interest rate has a 2% annual cap rate and a 5% lifetime cap rate

Which of the following is a disadvantage of PLAMs?

The price level used to index PLAMs is measured on an ex post basis and historic pricesmay not be an accurate reflection of future price.

Which loan in the above table should have the lowest initial interest rate?

loan 1

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

loan 1

Which loan in the above table is a FRM?

loan 2

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

lower, higher