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Real Estate
Q:
A borrower is purchasing a property for $180,000 and can choose between two possible loan alternatives. The first is a 90% loan for 25 years at 9% interest and 1 point and the second is a 95% loan for 25 years at 9.25% interest and 1 point. Assuming the loan will be repaid in 5 years, what is the incremental cost of borrowing the extra money?
A) 13.95%
B) 13.67%
C) 14.42%
D) 12.39%
Q:
A borrower is purchasing a property for $180,000 and can choose between two possible loan alternatives. The first is a 90% loan for 25 years at 9% interest and 1 point and the second is a 95% loan for 25 years at 9.25% interest and 1 point. Assuming the loan will be held to maturity, what is the incremental cost of borrowing the extra money?
A) 13.66%
B) 13.50%
C) 14.34%
D) 12.01%
Q:
Which of the following statements concerning a 30 year, $150,000 loan at 7% with monthly payments is true, if 15 years later, an investor wants to purchase the loan and market interest rates are 5%?
A) The market value of the loan is higher than the book value of the loan because the market rate of interest is lower than the interest rate on the loan
B) The market value of the loan is lower than the book value of the loan because the market rate of interest is lower than the interest rate on the loan
C) The market value of the loan is higher than the book value of the loan because the market rate of interest is higher than the interest rate on the loan
D) The market value of the loan is lower than the book value of the loan because the market rate of interest is higher than the interest rate on the loan
Q:
A borrower has secured a 30 year, $150,000 loan at 7% with monthly payments. Fifteen years later, an investor wants to purchase the loan from the lender. If market interest rates are 5%, what would the investor be willing to pay for the loan?
A) $75,000
B) $111,028
C) $118,478
D) $168,646
Q:
A borrower has secured a 30 year, $150,000 loan at 7% with monthly payments. Fifteen years later, the borrower has the opportunity to refinance with a fifteen year mortgage at 6%. However, the up front fees, which will be paid in cash, are $2,500. What is the return on investment if the borrower expects to remain in the home for the next fifteen years?
A) 6.00%
B) 13.00%
C) 22.62%
D) 28.89%
Q:
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?
A) 1.00%
B) 6.00%
C) 12.95%
D) 18.67%
Q:
The primary benefit of choosing biweekly mortgage payments versus monthly payments is the savings from lowering the average amount paid each month.
Q:
The incremental cost of borrowing may also be referred to as the marginal cost of borrowing.
Q:
Home equity loans do not require a mortgage lien on the property.
Q:
A loan with biweekly payments will have more interest than a monthly loan with the same interest rate and loan term.
Q:
Buydown loans have initial payments that are lower than they would be without the buydown provision.
Q:
A potential buyer is interested in purchasing a home that has an assumable below-market loan. The buyer determines that the financing premium associated with the below-market loan is worth $4,300. If similar houses sell for $100,000, the buyer should be willing to pay $104,300 or more for the property.
Q:
A house that is financed with a below-market loan is available for sale. The value of the house will be higher than similar properties regardless of the other terms of the loan.
Q:
If interest rates decrease, the market value of a loan previously made will increase.
Q:
Homeowners should not borrow refinancing costs because the effective rate of refinancing will be higher.
Q:
A borrower is considering refinancing and finds that the return, considering refinancing charges and lower payments, is 10%. The borrower can earn 12% on alternative investments so the property should be refinanced.
Q:
The effective cost of a wraparound loan should be comparable to the cost of a second mortgage with the same loan-to-value ratio.
Q:
The cash equivalent value of a house that sold with favorable financing is usually less than its sale price.
Q:
A borrower takes a 30-year, fully amortizing, 5/1 ARM for $225,000 with an initial interest rate of 4.375%. Assuming the index on which the loan rate is based rises by 1% in the fourth year of the loan and remains at that level, what will the payment be in the sixth year of loan?
A) $1,123.39
B) $1,241.89
C) $1,259.94
D) $1,403.71
Q:
What is the meaning of the following: Interest is capped at 2%/5%.
A) The loan has a 2% annual cap rate and a 5% lifetime cap rate.
B) The borrower can choose the cap he wants by simply circling the appropriate choice.
C) The loan has a 2% lifetime cap rate and a 5% annual cap rate.
D) The loan has a 2% annual cap rate and a 5% floor cap rate.
Q:
Given that every other factor is equal, which of the following ARMs will have the lowest expected cost?
A) An ARM with payment caps and negative amortization
B) An ARM with interest rate caps
C) An ARM with a longer adjustment interval
D) An ARM with no caps or limitations
Q:
The expected cost of borrowing depends on which of the following provisions?
A) The frequency of payment adjustments
B) The inclusions of caps and floors on the interest rate, payment or loan balances
C) The spread over the index chosen for a given ARM
D) All of the above
Q:
Which of the following clauses leads to higher risk for an ARMs lender?
A) Negative amortization is not allowed when interest is not covered by the payment due to a payment cap
B) There is a floor for payments.
C) Adjustment interval is longer than one year
D) All of the above
Q:
Which of the following is a disadvantage of PLAMs?
A) Lenders face high levels of interest rate risk under PLAMs.
B) Fewer homebuyers are likely to qualify for financing using PLAMs in comparison to CPMs.
C) The price level used to index PLAMs is measured on an ex post basis and historic prices may not be an accurate reflection of future price.
D) All of the above.
Q:
If one of the terms of an ARM read, interest is capped at 2%/5%, what would that mean?
A) The borrower can choose the cap he wants by simply circling the appropriate choice
B) The interest rate has a 2% annual cap rate and a 5% lifetime cap rate
C) The interest rate has a 5% annual cap rate and a 2% lifetime cap rate
D) The interest rate has a 2% annual cap rate and a 5% floor cap rate
Q:
If an ARM index increased 15%, the negative amortization on a loan with a 5% annual payment cap is calculated by:
A) Using the same payment as last year and deducting 5% from the principal balance
B) Increasing the payment by 5%
C) Totaling the difference between the payments with the 5% capped payment
D) Compounding the difference between the payments as if no cap existed and with the 5% capped payment
Q:
In order to calculate the APR for an ARM, you must,
A) Only use the first year's given interest rate
B) Estimate interest rates over the life of the loan
C) Assume the worst case scenario and use interest rates at their highest possible point over the life of the loan
D) Use only the first five year's interest rates because they can easily be estimated and most people only own a property for five years
Q:
Under which scenario is negative amortization likely to occur? Payment Cap Interest Rates (A)
None Increasing (B)
None Decreasing (C)
7.5% Increasing (D)
7.5% Decreasing A) Option A
B) Option B
C) Option C
D) Option D
Q:
LOAN 1
LOAN 2
LOAN 3
LOAN 4 Initial Interest Rate
?
?
?
? Loan Maturity (years)
20
20
20
20 % Margin Above Index
3% 3%
3% Adjustment Interval
1 yr. 1 yr.
1 yr. Points
1%
1%
1%
1% Interest Rate Cap
NONE 1%/yr.
3%/yr. With which loan in the above table does the lender have the lowest interest rate risk?
A) Loan 1
B) Loan 2
C) Loan 3
D) Loan 4
Q:
LOAN 1
LOAN 2
LOAN 3
LOAN 4 Initial Interest Rate
?
?
?
? Loan Maturity (years)
20
20
20
20 % Margin Above Index
3% 3%
3% Adjustment Interval
1 yr. 1 yr.
1 yr. Points
1%
1%
1%
1% Interest Rate Cap
NONE 1%/yr.
3%/yr. Which loan in the above table is a FRM?
A) Loan 1
B) Loan 2
C) Loan 3
D) Loan 4
Q:
LOAN 1
LOAN 2
LOAN 3
LOAN 4 Initial Interest Rate
?
?
?
? Loan Maturity (years)
20
20
20
20 % Margin Above Index
3% 3%
3% Adjustment Interval
1 yr. 1 yr.
1 yr. Points
1%
1%
1%
1% Interest Rate Cap
NONE 1%/yr.
3%/yr. Which loan in the above table should have the lowest initial interest rate?
A) Loan 1
B) Loan 2
C) Loan 3
D) Loan 4
Q:
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 Default Risk (A)
Higher Higher (B)
Lower Lower (C)
Higher Lower (D)
Lower Higher A) Option A
B) Option B
C) Option C
D) Option D
Q:
Which is NOT a component of an ARM?
A) A margin
B) An index
C) A chapter
D) Caps
Q:
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%. Assume that the loan allows for negative amortization. What would be the outstanding balance on the loan at the end of Year 3?
A) $190,074
B) $192,337
C) $192,812
D) $192,926
Q:
A borrower with an interest-only loan may end up owing more at the end of the loan than the original loan amount.
Q:
An ARM may also be referred to as a floating payment loan.
Q:
The default risk of a FRM is higher than the default risk of an ARM.
Q:
The floor of an ARM is the maximum reduction of payments or interest rates allowed.
Q:
Lender's can partially avoid estimating interest rates by tying an ARM to an interest rate index.
Q:
A major benefit of a PLAM is the mortgage payment increases closely follows borrower salary increases.
Q:
Characteristics of a PLAM include an increasing mortgage payment and an adjusting loan balance tied to an index.
Q:
ARMs help lenders combat unanticipated inflation changes, interest rate changes, and a maturity gap.
Q:
ARMs were developed because lenders were tired of offering a limited selection of loan alternatives to borrowers.
Q:
What is the annual interest rate of a fully amortizing, 20-year fixed rate $175,000 mortgage, with a monthly payment of $1,266.41?
A) 5.10%
B) 6.125%
C) 6.25%
D) 6.375%
Q:
What is the principal portion of the 222 payments of a fully amortizing $250,000, 30-year fixed rate loan with an interest rate of 4.825%?
A) $562.38
B) $565.29
C) $753.07
D) $1,315.44
Q:
If a fully amortizing 30-year fixed rate mortgage was originally taken at $200,000, but now has a balance of $50,385, how many more monthly payments will it take before it will be paid off?
A) 45 months
B) 51 months
C) 55 months
D) 90 months
Q:
Which one of the following is TRUE about prepayment penalties?
A) They are never used with residential mortgages
B) They lower the effective cost if the loan is repaid before maturity
C) They are equivalent to charging additional points for the loan
D) They are not included in the APR calculation
Q:
Assuming all APRs equal, the effective interest rate on a loan is highest when:
A) The loan has no points and a 30-year maturity and is prepaid in five years
B) The loan has no points and is prepaid at maturity
C) Points are charged and the loan is paid off at maturity in 30 years
D) Points are charged and the loan has a 30-year maturity but is prepaid in five years
Q:
APR stands for which of the following?
A) Annual percentage rate
B) Amortized percentage regulator
C) Accrued percentage rate
D) Annual percentage regulator
Q:
Points are also known as:
A) Third party charges
B) Reduction in payment amount
C) Loan discount fees
D) Reduction of mortgage yield
Q:
Demand for a mortgage loan is considered:
A) Stable demand
B) Derived demand
C) Interest rate demand
D) Nominal demand
Q:
Because its payment stream looks like a staircase, which loan is sometimes referred to as "stepped-up" financing due to prearranged payment increases?
A) CAM
B) CPM
C) GPM
D) ARM
Q:
Over the life of the loan, which of the following loans would continually have a lower principal balance given each loan had the same term, principal amount, and average interest rate?
A) CAM
B) CPM
C) GPM
D) GAM
Q:
Which mortgage would a borrower prefer to have during inflationary and recessionary periods? Inflationary
Inflationary (A)
CPM
GPM (B)
GPM
CAM (C)
CPM
CAM (D)
CPM
GPM A) A
B) B
C) C
D) D
Q:
Which of the following closing costs DO NOT increase the lender's effective loan yield?
A) Discount points
B) Prepayment penalties
C) Title insurance charges
D) Origination fees
Q:
At the end of five years, calculating the loan balance of a constant payment mortgage is simply the:
A) Present value of a single amount
B) Future value of a single amount
C) Present value of an ordinary annuity
D) Future value of an annuity due
Q:
In comparison to the first month's payment of a CAM, the first month's payment of a CPM:
A) Is higher
B) Is lower
C) Is the same
D) Cannot be determined with this information
Q:
One of the most popular amortizing mortgages today is the constant payment mortgage. Which of the following characterizes the components of the CPM payment over the life of the loan? Interest
Amortization
Payment (A)
Decreasing
Decreasing
Decreasing (B)
Increasing
Decreasing
Constant (C)
Decreasing
Increasing
Constant (D)
Constant
Constant
Constant A) Option A
B) Option B
C) Option C
D) Option D
Q:
One of the first amortizing mortgages was the constant amortization mortgage (CAM). Which of the following characterized the components of the CAM payment over the life of the loan? Interest
Amortization
Payment (A)
Decreasing
Decreasing
Decreasing (B)
Constant
Decreasing
Decreasing (C)
Decreasing
Constant
Decreasing (D)
Constant
Constant
Constant A) Option A
B) Option B
C) Option C
D) Option D
Q:
Risk is an important component of interest rates. Which of the following risks is NOT a determinant of interest rates?
A) Default risks
B) Interest rate risks
C) Institutional risks
D) Marketability risks
Q:
Which of the following is NOT a determinant of interest rates for single family residential mortgages?
A) The demand and supply of mortgage funds
B) Inflation expectations
C) Liquidity
D) The demand and supply of apartments
Q:
A borrower takes out a 30-year mortgage loan for $100,000 with an interest rate of 6% plus 4 points. What is the effective annual interest rate on the loan if the loan is carried for all 30 years?
A) 5.6%
B) 6.0%
C) 6.4%
D) 6.6%
Q:
A borrower has a 30-year mortgage loan for $200,000 with an interest rate of 6% and monthly payments. If she wants to pay off the loan after 8 years, what would be the outstanding balance on the loan?
A) $84,886
B) $91,246
C) $146,667
D) $175,545
Q:
A borrower takes out a 30-year mortgage loan for $250,000 with an interest rate of 5% and monthly payments. What portion of the first month's payment would be applied to interest?
A) $694
B) $1,042
C) $1,342
D) $1,355
Q:
A borrower takes out a 30-year mortgage loan for $250,000 with an interest rate of 5%. What would the monthly payment be?
A) $694
B) $1,042
C) $1,342
D) $1,355
Q:
With a negative amortizing loan, the borrower will end up with a loan balance at the end of the loan that is greater than the original loan balance.
Q:
A reverse mortgage can be a good option for first-time homebuyers who cannot make a substantial down payment.
Q:
The APR for a loan assumes it is prepaid after ten years.
Q:
Borrowers with fixed rate mortgages generally benefit if actual inflation is higher than expected inflation.
Q:
Graduated payment mortgage are loans available to people who have graduated from college.
Q:
Prepayment penalties increase the lender's mortgage yield and discount points decrease it.
Q:
The annual percentage rate closely approximates the borrower's true cost of funds.
Q:
Truth-in-lending requires the borrower to tell the truth on the loan application.
Q:
The effective interest rate on a mortgage will always be higher than the stated rate of the loan.
Q:
Determining a loan balance on a CPM is a simple present value of an annuity problem.
Q:
One difference between the constant amortizing mortgage (CAM) and the constant payment mortgage (CPM) is the interest paid and loan amortization relationship. With a CAM, the loan amortization and interest paid are directly related and with the CPM the loan amortization and the interest paid are inversely related.
Q:
Lenders and investors worry about default, interest rate, marketability, and liquidity risks.
Q:
Inflation makes very little difference to lenders of and investors needing money.
Q:
How much money does Ted need to invest each month in order to accumulate $10,000 over a five-year period, if he expects to get a return of 5.625% per year?
A) $144.71
B) $1,787.30
C) $148.94
D) $146.36
Q:
For situations calling for other than annual compounding, each of these factors (when present) must be adjusted for the number of compounding periods in a year:
A) PV & FV
B) N & i,
C) N, i, & PMT
D) N, i, PV, & PMT