Quizzes For Exam 2

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

You are buying a house and need $200,000 in financing. What is the effective cost of the financing if you agree to proceed with the following package? The bank is offering you two loans to get you the $200,000 you need. Loan Amt Interest Term $175,000 10% 30 Years $ 25,000 14% 30 years

10.52%

A house is for sale for $250,000. You have a choice of two 20-year mortgage loans with monthly payments: (1) if you make a down payment of $25,000, you can obtain a loan with a 6% rate of interest or (2) if you make a down payment of $50,000, you can obtain a loan with a 5% rate of interest. What is the effective annual rate of interest on the additional $25,000 borrowed on the first loan?

12.95%

A loan was made 10 years ago for $140,000 at 10.5% for a 30 year term. Rates are currently 9.25%. What is the market value of the loan?

139,828

A borrower made a mortgage loan 7 years ago for $160,000 at 10.25% interest for 30 years. The loan balance is now $151,806.62 and rates for this amount are currently 9.0% for 23 years. Origination fees and closing costs are $4,500 and closing costs are not financed by the lender. What is the effective cost of refinancing?

9.39%

Bud is offering a house for sale for $180,000 with an assumable loan which was made 5 years ago for $140,000 at 8.75% over 30 years. An assumable loan allows the new buyer to take over Bud's payments, and gain financing equal to Bud's loan balance. Kelsey is interested in buying the property and can make a $20,000 down payment. A second mortgage can be obtained for the balance at 12.5% for 25 years. What is the effective cost of the combined loans, if Kelsey would like to compare this financing alternative to obtaining a first mortgage for the full amount?

9.39%

Which is NOT a component of an ARM?

A chapter

A borrower with an interest only loan may end up owing more at the end of a loan than the original loan amount

False

ARMs were developed because lenders were tired of offering a limited selection of loan alternatives to borrowers.

False

Negative amortization reduces the principal balance of a loan.

False

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: lower Default risk: higher

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

It should be compared to the cost of obtaining a second mortgage (or of borrowing elsewhere)

Under which scenario is negative amortization likely to occur

Payment cap of 7.5% and interest rate increasing

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

The market value of a loan is:

The present value of the remaining payments

Lender's can partially avoid estimating interest rates by tying an ARM to an interest rate index.

True

The incremental cost of borrowing may also be referred to as the marginal cost of borrowing.

True