REE Chapter 10

Suppose you have computed the benefit of refinancing using the Ling-Archer Net Benefit approach, and have found a gross benefit (before costs) of $15,000. Further, assume that you can deduct for income taxes all the mortgage interest you pay, and that your tax rate on additional income (marginal tax rate) is 25 percent. What is your gross benefit of refinancing after taxes? If the cost of refinancing is $10,000, what is your after tax Net Benefit?

$11,250, $1,250

Suppose you have a $200,000 home mortgage with a monthly payment of $1,150 and you also have credit card debt of $20,000 with a monthly payment of $300 per month. Interest rates have declined so that your mortgage loan would have a payment of $1,000 if the only change in it were to adopt the market interest rate. Moreover, you can increase your debt to $220,000 and pay off the credit card debt. Your current combined monthly payment is $1,450. To examine the net benefit of refinancing both loans with the $220,000 mortgage, what would be your new payment for the purpose of computing net benefit? $1,000 + $300 (200,000/220,000) x $1,000 (200,000/220,000) x 1.150 (220,000/200,000) x $1,150 (220,000/200,000) x $1,000

(220,000/200,000) x $1,000

Under 2017 U.S. income tax law, it has been estimated that ________ percent of all homeowner households will receive income tax deductions for the home mortgage interest that they pay. 65 50 25 15

15

Select all that apply Most subprime loans were: 2-28 hybrid option ARM interest only reverse mortgages

2-28 hybrid option ARM interest only

Private mortgage insurance commonly protects the lender against the first _____ to________ percent of losses on a mortgage loan due to default.

25-35

With the following information, compute the Net Benefit of refinancing: Current loan balance: $200,000Remaining term: 15 years Interest rate: 6.5 percent Old loan monthly payment: $1,742.22Expected number of future payments you will make: 72Interest rate available on a new loan: 4.5 percent Cost of refinancing: 5 percent of outstanding balance. Resulting Net Benefit _______

5,280.43

if a borrower's house is worth $200,000, the borrower has a first mortgage balance of $100,000, and a HELOC lender will give a home equity line of credit loan such that the total mortgage balance is 80 percent, then the maximum line of credit will be $________

60,000

Cancellation of PMI may be allowed after the loan balance is below _____ percent of current market value, and, by law, must be terminated when the loan balance is below ______ of original value.

80, 78

Select all that apply A guide rule for determining whether refinancing a home loan is beneficial should account for which of the following "dimensions"? Whether you can increase the loan amount Amount of interest rate "spread" The loan-to-value ratio How long you will keep the loan Cost of refinancing

Amount of interest rate "spread" How long you will keep the loan Cost of refinancing

Valid statements about FHA insurance include: FHA insures loans up to 96.5 percent of value. FHA accepts more tolerant qualifying ratios and credit score than for conventional mortgages. FHA requires longer time than conventional lenders to qualify for a new mortgage after bankruptcy or default. FHA targets first-time home buyers and other moderate income households.

FHA insures loans up to 96.5 percent of value. FHA accepts more tolerant qualifying ratios and credit score than for conventional mortgages. FHA targets first-time home buyers and other moderate income households.

Select all that apply Improving the housing finance system has these positive effects on society: Households can become home owners sooner in life Home owners can reduce their risk of default Home owners can improve their credit rating Home owners can sell their home more easily Home owners can gain greater financial liquidity and diversification

Households can become home owners sooner in life Home owners can sell their home more easily Home owners can gain greater financial liquidity and diversification

The predominant approaches to housing assistance by the U.S. government have been through: Construction of modest homes and apartments Insurance against mortgage default Guarantees against mortgage default Allowing state and local governments to issue tax-free housing finance bonds

Insurance against mortgage default Guarantees against mortgage default Allowing state and local governments to issue tax-free housing finance bonds

Which of these statements is (are) correct about conventional mortgage loans? Heavily influenced the shape and form of "government" mortgages Is the oldest form of home mortgage loan Is the most common type of home mortgage loan In recent years has been created in three different qualities

Is the oldest form of home mortgage loan Is the most common type of home mortgage loan In recent years has been created in three different qualities

Before innovations (brought by FHA), the typical home loan had which of these features: Term of just a few years Large "balloon" payment at maturity Negative amortization 50-60 percent loan-to-value Usually from an international source

Term of just a few years Large "balloon" payment at maturity 50-60 percent loan-to-value

Select all that apply Valid aspects of housing assistance programs include: The USDA Rural Housing Services makes direct home loans to qualified rural households most observers believe that government construction of housing is the most efficient approach to housing assistance state and local housing agencies make low interest loans to qualified households The Federal Housing Administration insures home loans for qualified borrowers The Veterans Administration guarantees home loans for qualified veterans

The USDA Rural Housing Services makes direct home loans to qualified rural households state and local housing agencies make low interest loans to qualified households The Federal Housing Administration insures home loans for qualified borrowers The Veterans Administration guarantees home loans for qualified veterans

Housing assistance programs in the United States since World War II have been predominantly through: Through building U.S. government public housing Through state and local housing supply The home mortgage lending system Through supporting state and local public housing construction

The home mortgage lending system

Select all that apply Variations of the I-O mortgage include: a loan that is I-O for 15 years and then converts to fully amortizing level payment for the remaining term. standard I-O but with guarantee not to foreclose on the loan when the balloon payment is due. a standard I-O but with lender's promise to fund pay off in 5-7 years with a fully amortizing loan.

a loan that is I-O for 15 years and then converts to fully amortizing level payment for the remaining term. a standard I-O but with lender's promise to fund pay off in 5-7 years with a fully amortizing loan.

Select all that apply Initially, Qualified Mortgages include mainly:: all conforming conventional loans those meeting the requirement specified in the Dodd-Frank Act other loans made prior to the enactment of the Dodd-Frank Act all FHA and VA loans

all conforming conventional loans those meeting the requirement specified in the Dodd-Frank Act all FHA and VA loans

A VA loan can reduce the cash obligation of the borrower to: a funding fee only closing costs only a loan insurance premium nothing

closing costs only

Select all that apply Originators of mortgage loans include: Fannie Mae and Freddie Mac commercial banks mortgage brokers mortgage banking companies savings and loan associations and credit unions

commercial banks mortgage brokers mortgage banking companies savings and loan associations and credit unions

If a refinance decision involves replacing multiple loans with an increased first mortgage loan the solution involves: compute the "old" payment as the sum of all the payments to be replaced. compute the difference between all old payments and all revised payments and proceed as with a single loan replacement. for each old loan, compute the reduction in payment with the new interest rate, keeping all other terms as they were. always using after tax analysis in the case of multiple loans where one or more is a consumer credit loan.

compute the "old" payment as the sum of all the payments to be replaced. compute the difference between all old payments and all revised payments and proceed as with a single loan replacement. for each old loan, compute the reduction in payment with the new interest rate, keeping all other terms as they were.

The maximum guarantee on a VA loan is one fourth of the loan limit for_____________ conventional loans, those acceptable for purchase by Fannie Mae or Freddie Mac. In effect, this sets the maximum VA loan amount equal to the conforming conventional maximum.

conforming

Any standard home loan that is not insured or guaranteed by an agency of the US government is a _________ mortgage loan.

conventional

Private mortgage insurance applies to __________mortgage loans, and generally is required on mortgages with a loan-to-value ratio exceeding ________________ percent of value.

conventional , 80

Reasons why both Net Benefit and Net Present Value analysis of refinancing tend to overstate actual benefits include: cost of personal time and hassle fees charged by the lender for the new loan risk that rates could decline further income tax effects

cost of personal time and hassle risk that rates could decline further income tax effects

The existence of a well functioning secondary mortgage market makes the primary mortgage market more _________ .

efficient

Select all that apply "Trigger" events that may precipitate home mortgage default under the right conditions can include: health failure unemployment death in the household drop in house value appliance failure divorce abrupt payment increase

health failure unemployment death in the household divorce abrupt payment increase

Of the several reasons why net benefit analysis and net present value analysis can overstate the value of refinancing, one that applies only to a minority of U.S. households today is: the "hassle" of refinancing variation on lender fees risk that interest rates will go lower income tax effects

income tax effects

A conventional mortgage loan that meets all the requirements of Fannie Mae and Freddie Mac except that it is too large is called a ________________ conventional mortgage.

jumbo

In the FHA Home Equity Conversion Mortgage (HECM) program FHA commits to the lender that if the balance at sale exceeds the value of the house, FHA will pay the difference to the

lender

Private mortgage insurance protects only a l________ , and only against losses due to ________.

lender default

Select all that apply Some factors that affect the premium charged for PMI include: length of loan term borrower's credit record demographics of the household loan-to-value ratio use of property (owner occupied, rental, second home)

length of loan term borrower's credit record loan-to-value ratio use of property (owner occupied, rental, second home)

The most important effect on housing when interest rates rise is to make housing: smaller less affordable less desirable more expensive to build

less affordable

Loans eligible for purchase by Fannie Mae and Freddie Mac are much more _______ resulting in a lower contract ________ and more _________ terms across lenders and regions.

liquid interest rate uniform

The fundamental problem with the option ARM loan, as most commonly used, was that it created a rapid increase in the: term interest rate amortization loan balance

loan balance

In the first half of the 20th century the need for efficient systems for home financing grew strongly, compelled by the growing need in urban society for household: mobility home improvements liquidity wealth

mobility

Two conditions that generally appear to be required before a "trigger event" causes home mortgage default are; utility bill increase property tax expected to increase sharply in the future negative equity value of housing services falling below the monthly cost

negative equity value of housing services falling below the monthly cost

The premium on PMI is some combination of a lump sum payment at loan ______ or _________ installments.

origination, monthly

A second mortgage loan created at purchase along with a first mortgage of no more than 80 percent of value, can provide an alternative to mortgage insurance as a way to increase total financing above 80 percent of value. This kind of mortgage is called a ______________ mortgage.

piggyback

APR, while valuable in comparing the costs of mortgage loans has one main limitation: APR assumes the loan is never _________, while this actually happens to almost every home loan during the early part of its term.

prepaid

The loan origination market - where loans are created - is called the

primary mortgage market.

An event that enabled the long maturity and high loan-to-value ratio of modern prime conventional mortgages was the creation after World War II of _____________________.

private mortgage insurance

The FHA provides insurance against losses due to default on mortgages made by ______ lenders, with the insurance premium paid by the________ .

private, borrower

A central characteristic of most subprime and Alt-A loans was that at some point the borrower would be forced by the threat of a large payment increase to __________ in order to postpone the increase.

refinance

The Qualified Mortgage created in the Dodd-Frank Act of 2010 sets an ability-to- _________ standard for most home mortgages. Loans meeting the standard receive "safe harbor" protection against legal defenses of the __________ in case of default.

repay, borrower

As the loan-to-value (LTV) of a loan is higher the effective interest cost increases. This can result from multiple factors, including: Higher cost of owner title insurance as the loan is larger. required mortgage insurance above 80 percent LTV Higher cost of a "piggyback" second mortgage Higher interest rate on the first mortgage due to higher risk classification

required mortgage insurance above 80 percent LTV Higher cost of a "piggyback" second mortgage Higher interest rate on the first mortgage due to higher risk classification

Select all that apply Common sources of a home equity loan can include: mortgage brokers savings institutions commercial banks credit unions

savings institutions commercial banks credit unions

The long-term fixed-rate level-payment home mortgage works best in an environment of__________ and _______interest rates.

stable and low

Home equity credit lines can offer homeowners several advantages over other consumer loans, including: select all that apply no limit on the balance tax deductible interest longer term lower interest rate

tax deductible interest longer term lower interest rate

Select all that apply Characteristics of Qualified Mortgages include: total debt ratio no greater than 50 percent term no longer than 30 years ARM loans must be underwritten to highest rate in first five years fees no greater than 3 percent fully amortizing, with level payments

term no longer than 30 years ARM loans must be underwritten to highest rate in first five years fees no greater than 3 percent fully amortizing, with level payments

The most complete guides for mortgage refinancing decisions in use today account not only for interest rate spread, cost of financing and time you will keep the new mortgage, but also: The time it take to refinance the effect of time value The likelihood that interest rates will go lower the "hassle" of refinancing

the effect of time value

Characteristics of an interest-only mortgage include: the term usually is over 20 years the interest rate can be fixed or adjustable the full balance must be paid off at maturity payments are strictly interest the regular payment is significantly lower than with the level payment mortgage

the interest rate can be fixed or adjustable the full balance must be paid off at maturity payments are strictly interest the regular payment is significantly lower than with the level payment mortgage

Select all that apply Attractions of the hybrid mortgage include: The borrower should be able to borrow more than with a standard fixed rate loan. the lender faces much lower interest rate risk than with a fixed rate loan. the borrower can expect a rate lower than a standard fixed rate since the fixed term is shorter. the borrower has fixed payments during the early, most budget-sensitive years.

the lender faces much lower interest rate risk than with a fixed rate loan. the borrower can expect a rate lower than a standard fixed rate since the fixed term is shorter. the borrower has fixed payments during the early, most budget-sensitive years.

Homeowners generally do not default by choice on a home mortgage loan, even when the value of the house is below the mortgage balance. Reasons for this can include: the value of living in the house exceeds the monthly cost resulting household disruption relocation costs, both financial and non-financial resulting damage to one's credit waiting for the market to decline further to get a better bargain on another house

the value of living in the house exceeds the monthly cost resulting household disruption relocation costs, both financial and non-financial resulting damage to one's credit

A fundamental problem in comparing the cost of mortgage loans is that cost is a combination of upfront expenses and annual interest. To solve this problem, APR converts __________ into ___________.

upfront expenses, annual interest