Real Estate Principles Chapter 15

Given the following information on a monthly payment mortgage, calculate the level monthly mortgage payment. loan amount: $56,000; loan term: 15 years; (annual) contract interest rate: 7.5%.

$519.13

Determine the level monthly payment for the following mortgage: $90,000, 30 years, 10% annual interest rate. Payment is $_______________.

$789.81

Which of the following mortgages typically places more of the interest rate risk to the lender?

LPMs

As required by Federal Reserve Regulation Z, which of the following characteristics must be accounted for when calculating APR?

-discount points -origination fees

In addition to discount points, home mortgage borrowers usually pay which of the following as up-front financing costs?

-title insurance -a loan origination fee -loan application and document preparation fee

A loan for $250,000 is made for 15 years at 6% annual interest. The lender and borrower agree that payments will be made monthly. Assuming three discount points are charged by the lender and the borrower will keep the loan outstanding to maturity, what will be the lender's yield?

0.54%

All else equal, an increase in up-front financing costs has a larger impact on the effective borrowing cost

the shorter is the expected holding period

Holding the contract interest rate constant, the effective borrowing cost increases as _____________.

up-front financing costs increase

Assume you have obtained an interest-only mortgage. The loan amount is $300,000, payments will be made monthly, the (annual) interest rate is 4%, and the loan term is 30 years. What is the monthly payment?

$1,000

Suppose you are buying your first condo for $300,000 and you will make a $60,000 (equity) down payment. You have arranged to finance the remainder (loan amount=$240,000) with a 30-year, monthly payment, fully amortized mortgage at a 6% annual interest rate. What will be your monthly payment?

$1,438.92

Given the following information for a 30-year, $180,000 ARM loan, what is the remaining mortgage balance at the end of year 3: Margin, 3%, index for the beginning of year 2, 3%; Index for the beginning of year 3, 5%; teaser, 6%. Assume no cap.

$173,693.42

Debbie qualifies to borrow $250,000 on a mortgage at 6% for 30 years with monthly payments. Based on this information, determine the remaining loan balance at at the end of year three (round to the nearest cent).

$240,210.18

Jake has just taken out a 15-year mortgage for $80,000 at an (annual) interest rate of 6% with equal end-of-month payments. How much interest will he pay in the second year of the mortgage? (round to the nearest cent)

$398.62

Joe borrows $80,000 at 6% for 30 years with monthly amortization. Assume that the mortgage payment is made on the last day of the month. How much interest will he pay in the first year of the mortgage? (round to the nearest cent)

$5,755.69

Assume a $100,000 ARM with 30-year (monthly payments) maturity and an initial rate of 6%. The interest rates is to remain fixed for the first 5 years. If the ARM rate rises to 6.5% at the beginning of year 6 (end of year 5), what is the new payment in year 6? (round to the nearest cent)

$628.31

Assume a $100,000 ARM with 30-year (monthly payments) maturity and an initial rate of 6%. The interest rates remains fixed at 6% for the first three years. If the ARM rate rises to 6.5% at the beginning of year 4 (end of year 3), what is the new payment in year 4? (round to the nearest cent)

$629.88

Given the following, calculate the balloon payment for a partially amortized loan. Loan amount: $84,000 Term to maturity: 7 years Amortization term: 30 years Interest Rate: 4.5% Monthly payment: $425.62

$73,102

Which of the following characteristics distinguish APR from EBC? (check all the correct answers)

-APR assumes no prepayment -APR ignores appraisal fees

Under the Real Estate Settlement and Procedures Act (RESPA), which of the following costs should be included in the EBC calculation?

-Appraisal fee -Discount points -Loan origination fees

Assume a $100,000 mortgage loan with 30-year term. The lender is charging an annual interest rate of 10% and two discount points at origination. Up-front financing costs paid to third parties equal $1,000. Assuming the mortgage is held for five years and then prepaid, what is the lender's yield on the loan?

10.52%

At any point in time, which of the following ARM products typically has the highest effective borrowing cost, all else equal?

10/1 ARMs

At any point in time, which of the following ARM products typically has the lowest effective borrowing cost, all else equal?

3/1 ARMs

________ year mortgages are a common form of LPM, but _________ year mortgages are also popular.

30, 15

The ______ ARM has become the most popular ARM product in recent years.

5/1

Assume a $100,000 monthly payment mortgage loan with 30-year term. The lender is charging an annual interest rate of 10% and two discount points at origination. Upfront financing costs paid to third parties total $1,000. Assuming the mortgage is held outstanding by the borrower for the full 30 years, the lender's yield is ________ percent. (round to two decimal places)

10.24

Assume a $100,000 monthly payment mortgage loan with 30-year term. The lender is charging an annual interest rate of 10% and two discount points at origination. Up-front financing costs paid to third parties total $1,000. Assuming the mortgage is held for five years and then prepaid, what is the EBC on this mortgage?

10.79%

Assume the following information for a 30-year, $180,000 Arm loan: margin 3% (300 basis point); index rate at the beginning of year 2: 3% initial interest (teaser rate): 4.5%; periodic cap: 1%. Assume that the periodic cap applies to the teaser rate. What is the contract interest rate at the beginning of year 2?

5.5%

For how many years will the contract interest rate be fixed with a 7/1 adjustable-rate mortgage (ARM)?

7 years

For a $300,000 loan at a 12% annual interest rate with a 30-year amortization period, how many discount points would the lender have to charge to increase the lenders' yield to 13%? Assume monthly payments and no prepayment of the mortgage by the borrower prior to maturity.

7.01

A loan for $200,000 is made for 30 years at 8% annual interest. The lender and borrower agree that payments will be made monthly. Assuming two discount points are charged by the lender and the borrower will not prepay prior to maturity, what will be the annualized lender's yield?

8.21%

Assume a $250,000 mortgage loan with 15-year term. The lender is charging an annual interest rate of 8% and three discount points at origination. Other up-front financing costs paid to other service providers (i.e., not the lender) total $1,000. What is the lender's yield on the loan? Assume monthly payments and no prepayment prior to loan maturity.

8.57%

Consider a mortgage with discount points paid to the lender and some upfront financing cost paid to third parties. If prepayment prior to maturity occurs, which of the following will be the highest?

EBC

Which of the following describes an early payment mortgage?

In any month, the borrower makes a principal payment that is larger than the scheduled principal payment

Nancy is a rational, financially unconstrained borrower. She is looking for a $100,000 LPM mortgage to finance her purchase of a beach house. Bank of America offers her two options, one with 15-year term and one with a 30-year loan term. Assume no up-front financing costs for both loans. Also assume Nancy would discount all future loan payments at the contract interest rate. Which loan is the least costly and therefore the better choice?

Nancy is always indifferent between the two options.

Which of the following characteristics are associated with fully amortizing, level-payment mortgages?

The periodic payments are constant over time.

The interest rate on ARMs originated by federally insured U.S. banks must be tied to a public index that is not controlled by the lender. The most common ARM indexes in the home loan market track interest rates on

U.S. Treasury securities

The balance of a partially amortizing mortgage loan at loan maturity is not zero and is typically satisfied with:

a balloon payment

The most common type of single family home mortgages loan is?

a fixed-rate, level payment, fully amortizing loan

In competitive mortgage markets, lenders must _________ the contract interest rate in exchange for _________ up-front financing costs such as discount points.

reduce, more

Cost associated with obtaining ownership of the property

should not be included in the EBC calculation

A borrower is choosing between a 15-year $100,000 mortgage and a 30-year $100,000 mortgage. Assume both would have the same contract interest rate and no up-front financing costs would be associated with either loan. If both loans remain outstanding until they are fully amortized, on which loan would more interest be paid?

the 30-year mortgage

The true (or realized) effective borrowing cost for an ARM is more difficult to predict than the EBC for a level-payment mortgage because

the mortgage payments and the holding period are uncertain

On a fixed-rate, level payment mortgage, the present value of the remaining payments at any point in time is equal to

the present value of the remaining payments discounted at the contract rate of interest

True or False: Borrowers who expect to keep the loan outstanding for a long period of time should generally consider paying discount points to buy down the interest rate.

true

True or False: borrowers typically get to choose the number of discount points they pay but not the loan origination fee.

true

True or false: Borrowers who expect to keep the loan outstanding for a long period of time should generally consider paying discount points to buy down the interest rate.

true

The ARM market was first developed in the early 1980s in response to ________ interest rates.

high and volatile

A borrower should consider making extra principal payments on a level-payment mortgage (assuming they are allowed)

if the dollar amount of those extra payments could not be invested at a higher return than the interest rate on the loan.

With an interest-only mortgage, the balance of the loan ______ over time.

is constant

True or false: At the maturity of a partially amortizing loan, the borrower must sell the property and use the sale proceeds to pay of the lender.

false

True or false: When the loan is closed, the borrower must pay a number of up-front financing costs. All of these costs (fees) should always be included in the calculation of lender's yield.

false

Which of the following loan characteristics must be considered when calculating the EBCs of two ARM products?

all of the characteristics must be considered

A primary reason why ARM interest rates are typically lower than those on otherwise comparable LPMs is because

borrowers and lenders share the interest rate

Holding constant the contract interest rate and the number of discount points, the borrower's effective borrowing cost ________ as the expected number of years the loan is outstanding ____________.

decreases, increases

True or False: Federal law requires that home loans have 30-year or 15-year terms/maturities.

false