Exploring Mortgage Alternatives

The popularity of ARM increases when interest rates fall.

False- ARMS increase in popularity when interest rates rise. When rates are low, borrowers are likely to lock in the low rate on a 15-30 year mortgage, not on an ARM.

The maximum seller paid closing costs on a new FHA loan for a house purchased for $200,000 is $6,000.

False- FHA allows seller to pay up to 6% of the purchase price of the home, so the seller can pay up to $12,000 ($200,000 X .06)

The payment factor for a 30 year mortgage at 4.5% is 5.07 per thousand. The monthly principal and interest for a 30 year loan of $300,000 at 4.5% is $1,125.

False- $1,521 ($300,000/ 1,000 = $300; $300 x 5.07 = $1,521)

The 15-year fixed-rate mortgage has become popular in recent years, even though it costs borrowers thousands of dollars more in interest charges than would be incurred with a 30-year fixed-rate mortgage.

False- 15 year fixed rate mortgage saves borrowers thousands of dollars in interest

A biweekly mortgage has 24 payments each year.

False- 52 weeks/2= 26 payments

Licensees should advise buyers who are shopping for a mortgage to focus exclusively on lenders offering lowest rates.

False

A man is shopping for a new loan and has narrowed the field to two choices. One is a 30-year fixed-rate loan that has principal and interest payments of $940 per month. The other is a biweekly mortgage. What is the difference in the annual payments based on this information?

- $470 - no difference in payments but a big difference in interest saved - no difference in payments and no difference in interest saved - $940 The answer is $940. The biweekly mortgage takes the normal payment, divides it in half, and requires the borrower to pay every other week (26 times per year). So, $940 ÷ 2 = $470. $470 × 26 = $12,220. The normal loan would have 12 payments at $940 ($11,280). The difference is $940.

A $127,000, 30-year fixed-rate mortgage with a 5.5% rate has a mortgage payment factor of .0056779. Annual payments for property taxes are $2,400. The annual insurance premium is $600. What will be the monthly PITI payments?

- $721.09 - $771.09 - $921.09 - $971.09 The answer is $971.09. Multiply the mortgage by the factor, and then add one-twelfth of the taxes and insurance. Solution: $127,000 × .0056779 = $721.09; $721.09 + $200 taxes ($2,400 ÷ 12) + $50 insurance ($600 ÷ 12) = $971.09.

In 2012, a man purchased a new home at the FHA appraisal amount of $100,000 and financed it with an FHA mortgage loan. To what amount must he reduce the outstanding loan balance before he no longer has to pay the 0.5% annual mortgage insurance premium?

- $85,000 - $80,000 - $78,000 - $90,000 The answer is $78,000. The borrower must increase the equity to 22%, (by reducing the mortgage to 78%) of the purchase price of the property.

Total interest rate increases on an FHA adjustable rate loan may NOT exceed what percentage over the life of the loan?

- 1% - 5% - 2% - 3% Lifetime Cap on conventional loans is 6%

The interest rate that major banks charge to MOST favored customers and that is commonly used for home equity loans is the

- 11th District Cost of Funds Index (COFI) - monthly treasury bill average (MTA) - prime rate - london interbank offered rate (LIBOR) The prime rate charged by major banks is "prime" for the best customers.

What is the maximum amount of a buyer's closing costs that the seller can pay under conventional lending standards when the borrower is making a 5% down payment?

- 4% of purchase price - 5% of loan amount - 6% of loan amount - 3% of purchase price The answer is 3% of the purchase price. When the borrower is making less than 10% down payment, the seller can pay 3% of the purchase price.

A woman is shopping for a new $150,000 mortgage. She expects to live in her new home for about four years. She can get a 30-year, 4.75% fixed-rate mortgage with principal and interest payments of $1,074.62 with no points. She can also get a 4.25% mortgage loan (payments of $1,023.26) with three points. How many months will it take the woman to break even on the points if she takes the lower interest rate loan, using simple arithmetic?

- 48.5 - 87.6 - 58.6 - 101 The answer is 87.6. Divide the amount paid in points by the difference in payments. That will give the payback period. $150,000 × .03 = $4,500 in points paid. $4,500 ÷ ($1,074.62 - $1,023.26) = 87.6 months payback.

On January 10, the one-year Treasury bill index was 4%. A mortgage company used that index to write a new one-year adjustable-rate with a 2.5% margin. What is the calculated interest rate?

- 8% - 6.5% - 4% - 6% The answer is 6.5%. The calculated rate is determined by adding the margin to the index. The margin is 2.5% and the index is 4%. 4% + 2.5% = 6.5%.

Of the recognized indexes used on ARM loans, which is MOST volatile?

- LIBOR index - one year treasury bill index - cost of funds index of the federal home loan bank - prime rate charged by money center banks The answer is prime rate charged by money center banks. The prime rate charged by major banks is the most volatile index of the choices given.

Which is TRUE about a loans effective interest rate?

- Origination fees should not be considered on an ARM based on index changes. - Each point equals a .5% increase in the lender's yield. - Origination fees should be added to the points charged in making the calculation. - Each point equals a one-eighth of 1% increase in the lender's yield, even if the loan is in force for less than five years. The answer is origination fees should be added to the points charged in making the calculation. Because the origination fees go to the lender, the lender must include them in the calculation.

Private mortgage insurance will probably NOT be canceled when the borrower achieves 22% equity if the borrower has not been current on the payments within the year before the time for termination or cancellation.

- True

Disclosure of the annual percentage rate of interest need NOT

- be given to the borrower within three days of loan application - be given to a prospective buyer of a single family home that is paying cash - be computed to the nearest one eighth of 1% - show the total financing cost in relation to the amount financed

When compared with a 30 year mortgage, a 15 year mortgage has

- lower monthly payments - higher interest rates - slightly lower interest rates - more flexibility on payment possibilities The answer is slightly lower interest rates. Because the risk of loss from inflation is less with a 15-year loan, the interest rates are lower.

The FHA adjustable rate mortgage limits increases on interest rates to

- no greater than 4% over the life of the loan - no greater than 2% in the first five years - no more than 2% annually - 1% annually The answer is 1% annually. An FHA ARM has several advantages over a conventional ARM. One of the biggest is that the interest-rate increase each year is limited to 1%, with a lifetime cap of 5% (conventional caps usually are 2% per year, with a 6% lifetime cap).

The factor in an adjustable-rate mortgage that causes the calculated interest rate to change is

- the index - the cap - the margin - the teaser rate

Which is FALSE about the annual percentage rate disclosure?

- the lender has a maximum of three business days after loan application to make the disclosure - the effective rate of interest is not affected by the number of years the mortgage loan stays in force - the definition is the effective interest rate for a loan repaid over its full term - the rate must be calculated to the nearest one- eighth of 1%

The component of an adjustable rate mortgage that does NOT usually change is:

- the points - the margin - the index - the calculated rate index changes; margin is constant

Disclosure of the annual percentage on a mortgage loan is required by

- truth in lending act TILA - equal credit opportunity act ECOA - real estate settlement procedures act RESPA - cost of funds index COFI

ARM loans are popular

- when interest rates are high - for people who are risk averse - than fixed rate mortgages in most markets - when interest rates are low

What is the index measuring the base interest rate paid on deposits between banks in the Eurodollar market that is used in many ARM?

-PRIME - MTA - COFI - LIBOR The answer is LIBOR. The LIBOR (London Interbank Offered Rate) is the base interest rate paid on deposits between banks in the Eurodollar market.

The interest rate increase on an FHA adjustable rate mortgage is capped at what?

1%

The biweekly mortgage has ______ payments each year.

26

The standard of the mortgage industry is the

30 year fixed rate mortgage

A house was purchased for $200,000 with a $180,000 loan. The private mortgage insurance will terminate automatically when the mortgage amount is $140,400.

False- PMI, private mortgage insurance, will terminate automatically when the mortgage amount is $156,000. ($200,000 x .78)

A standard provision of ARMs is a prepayment penalty.

False- no penalty

PITI

Principal, Interest, Taxes, Insurance

Annual Percentage Rate (APR)

Standard expression of credit costs designed to give potential borrowers an easy method of comparing lenders total finance charges.

FHA ARMs have an advantage over conventional ARMs because the interest-rate increase each year is limited to 1%, with a lifetime cap of 5% (conventional caps usually are 2% per year, with a 6% lifetime cap).

True

FHA charges an up-front mortgage insurance premium and a monthly mortgage insurance premium.

True

Many borrowers prefer the 15-year fixed-rate mortgage because of the savings in interest over the life of the loan, but payments are substantially higher.

True

Private mortgage insurance must be terminated automatically when the borrower has achieved 22% equity in the home based on the purchase price, if the mortgage payments are current. PMI also can be canceled when the borrower requests it upon achieving 20% equity in the home based on the original property value.

True

The monthly MIP is canceled for borrowers who have achieved 22% equity in their house and after five years have elapsed, based on the lower of the purchase price or the appraisal.

True

The primary elements in determining the acceptability of an ARM from the borrower's viewpoint are the index, the lender's margin, the calculated interest rate, the initial interest rate, and the interest rate caps.

True

When considering whether to pay discount points, divide the difference in monthly payments into the total dollar amount of points to determine how many months it will take to break even.

True

If a lender offers a first mortgage for 4.5% and charges four points, the effective interest rate if the loan is held for at least 12 years is 5%.

True- Formula to calculate effective interest is note rate + (points/8) = effective interest rate. 4.5% + ( .04/8) = 4.5% + .5% = 5%

The annual percentage rate, by law, must be the relationship of the total financing charge to the total amount financed, and it must be computed to the nearest one eighth of 1%.

True- APR is the effective interest rate for a mortgage loan repaid over its full term.

The PITI payment includes the principle, interest, and escrow expenses in the monthly mortgage payment.

True- most lenders require an amount each month that includes principal and interest plus escrow items- property taxes, homeowners insurance, and possibly mortgage insurance or homeowners or condominium association dues.

The _______ is the component of an adjustable rate mortgage that changes.

index

The calculated rate on an adjustable rate mortgage is the _____ plus the _________ ?

margin and index

The APR is the effective interest rate for a mortgage loan repaid over its full term

true