Chapter 15 - Mortgage Calculations and Decisions

Chapter 15
Mortgage Calculations and Decisions
Multiple Choice Questions

1. The monthly mortgage payment divided by the loan amount is commonly referred to as
the:
A. loan balance
B. effective borrowing cost
C. lender's yield
D. monthly loan constant

2. From the borrower's perspective, the effective borrowing cost is often viewed as the
implied internal rate of return (IRR), since it takes into consideration costs that the borrower
faces, but which are not passed on as income to the lender. Included in this calculation are
closing costs, which may consist of all of the following EXCEPT:
A. Title insurance
B. Mortgage insurance
C. Recording fees
D. Earnest money

3. Required by the Truth-in-Lending Act, the annual percentage rate (APR) is reported by the
lender to the borrower on virtually all U.S. home mortgage loans. The APR accounts for all of
the following EXCEPT:
A. All finance charges in connection with the loan, such as discount points, origination fees,
and underwriting fees.
B. All compensation to the originating brokers if one was used by the borrower.
C. Any prepayment of principal to be made on the loan.
D. Premiums for required forms of insurance.

4. When lenders charge discount points (prepaid interest) on a loan, what impact does this
have on the loan's yield?
A. The yield on the loan will increase.
B. The yield on the loan will decrease.
C. The yield on the loan will be unaffected.
D. The yield on the loan automatically becomes zero.

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Chapter 15 - Mortgage Calculations and Decisions

5. For the purposes of estimating the effective borrowing cost (EBC), only those up-front
expenses associated with obtaining the mortgage should be included. With this in mind, which
of the following costs should not be included in one's calculation of EBC?
A. Discount points
B. Loan origination fees
C. Appraisal fee
D. Buyer's title insurance

6. When fully amortizing loans call for equal periodic payments over the life of the loan they
are known as:
A. level-payment mortgages
B. adjustable-rate mortgages
C. interest-only mortgages
D. early-payment mortgages

7. While a variety of loan terms are available in a lender's mortgage menu, the most common
loan term on a level-payment mortgage is:
A. 7 years
B. 15 years
C. 30 years
D. 40 years

8. Recently, 15-year mortgages have increased in popularity amongst both borrowers and
lenders. Which of the following groups of borrowers would typically be the least interested in
a 15-year mortgage?
A. Mature households with minimal financial constraints
B. First-time homebuyers
C. Homeowners who are refinancing to obtain a lower rate than is available on a comparable
30-year mortgage
D. Homeowners who are interested in selling their property within five years

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Chapter 15 - Mortgage Calculations and Decisions

9. Assume that a borrower has a choice between two comparable fixed-rate mortgage loans
with the same interest rate, but different mortgage terms, one being a 30-year mortgage and
the other a 15-year mortgage. Under financially unconstrained circumstances, which of the
following statements best describes the borrower's preference?
A. The borrower would prefer the 30-year mortgage.
B. The borrower would prefer the 15-year mortgage.
C. The borrower would be indifferent between the two mortgages.
D. The borrower is unable to compare mortgage loans of two different maturities.

10. Partially amortizing mortgage loans require periodic payments of principal, but are not
paid off completely over the loan's term to maturity. Instead, the balance of the principal
amount is paid at maturity in what is commonly referred to as a:
A. balloon payment
B. early payment
C. up-front payment
D. payment cap

11. With the recent popularity of adjustable-rate mortgages (ARM), lenders have begun to
offer ARMs with different adjustment periods. Which of the following ARM choices will
most likely have the highest initial rate?
A. Three-year-one-year ARM
B. Five-year-one-year ARM
C. Seven-year-one-year ARM
D. Ten-year-one-year ARM

12. In considering a three-year-one-year adjustable-rate mortgage (ARM), the interest rate

will be fixed for how many years?
A. One year
B. Two years
C. Three years
D. Four years

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Chapter 15 - Mortgage Calculations and Decisions

13. One reason why adjustable-rate mortgages (ARMs) have become popular has to do with
the impact that they have on the interest rate risk that is borne by the parties involved. If
interest rates were to rise on a level-payment mortgage (LPM) the interest rate risk of the loan
would typically be borne by:
A. the borrower only
B. the lender only
C. both the borrower and lender
D. neither the borrower nor the lender

14. To encourage borrowers to accept adjustable rate mortgages (ARMs) rather than levelpayment mortgages, mortgage originators generally offer an initial short-term introductory
rate that is less than the prevailing market mortgage rate. This rate is referred to as a(n):
A. floating rate
B. teaser rate
C. index rate
D. discount rate

15. Given the following information on a fixed-rate loan, determine the maximum amount
that the lender will be willing to provide to the borrower. Loan Term: 30 years, Monthly
Payment: $800, Interest Rate: 6%.
A. $6,707
B. $9,295.15
C. $13,333
D. $133,433

16. Given the following information on a 30-year fixed-payment loan, determine the
remaining balance that the borrower has at the end of seven years. Interest Rate: 7%, Monthly
Payment: $1,200.
A. $17,143
B. $79,509
C. $164,402
D. $180,369

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Chapter 15 - Mortgage Calculations and Decisions

17. Given the following information on an interest-only mortgage, calculate the monthly
mortgage payment. Loan amount: $56,000, Term: 15 years, Interest Rate: 7.5%.
A. $169.13
B. $350
C. $519.13
D. $4,200

18. Given the following information, calculate the balloon payment for a partially amortized
mortgage. Loan amount: $84,000, Term to maturity: 7 years, Amortization Term: 30 years,
Interest rate: 4.5%, Monthly Payment: $425.62.
A. $9,458
B. $30,620
C. $73,103
D. $84,000

19. Given the following information, calculate the lender's yield. Loan amount: $166,950,
Term: 30 years, Interest rate: 8 %, Payment: $1,225.00, Discount points: 2.
A. 7.7%
B. 8.0%
C. 8.2 %
D. 10.0 %

20. Given the following information, calculate the effective borrowing cost (EBC). Loan
amount: $166,950, Term: 30 years, Interest rate: 8 %, Payment: $1,225.00, Discount points: 2,
Other Closing Expenses: $3,611.
A. 7.7%
B. 8.2%
C. 8.5%
D. 9.1%

Chapter 15 Mortgage Calculations and Decisions Answer Key

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Chapter 15 - Mortgage Calculations and Decisions

Multiple Choice Questions

1. The monthly mortgage payment divided by the loan amount is commonly referred to as
the:
A. loan balance
B. effective borrowing cost
C. lender's yield
D. monthly loan constant

Difficulty: Basic
Learning Objective: 1

2. From the borrower's perspective, the effective borrowing cost is often viewed as the
implied internal rate of return (IRR), since it takes into consideration costs that the borrower
faces, but which are not passed on as income to the lender. Included in this calculation are
closing costs, which may consist of all of the following EXCEPT:
A. Title insurance
B. Mortgage insurance
C. Recording fees
D. Earnest money

Difficulty: Intermediate
Learning Objective: 2

3. Required by the Truth-in-Lending Act, the annual percentage rate (APR) is reported by the
lender to the borrower on virtually all U.S. home mortgage loans. The APR accounts for all of
the following EXCEPT:
A. All finance charges in connection with the loan, such as discount points, origination fees,
and underwriting fees.
B. All compensation to the originating brokers if one was used by the borrower.
C. Any prepayment of principal to be made on the loan.
D. Premiums for required forms of insurance.

Difficulty: Intermediate
Learning Objective: 2

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Chapter 15 - Mortgage Calculations and Decisions

4. When lenders charge discount points (prepaid interest) on a loan, what impact does this
have on the loan's yield?
A. The yield on the loan will increase.
B. The yield on the loan will decrease.
C. The yield on the loan will be unaffected.
D. The yield on the loan automatically becomes zero.

Difficulty: Basic
Learning Objective: 2

5. For the purposes of estimating the effective borrowing cost (EBC), only those up-front
expenses associated with obtaining the mortgage should be included. With this in mind, which
of the following costs should not be included in one's calculation of EBC?
A. Discount points
B. Loan origination fees
C. Appraisal fee
D. Buyer's title insurance

Difficulty: Basic
Learning Objective: 2

6. When fully amortizing loans call for equal periodic payments over the life of the loan they
are known as:
A. level-payment mortgages
B. adjustable-rate mortgages
C. interest-only mortgages
D. early-payment mortgages

Difficulty: Basic
Learning Objective: 3

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Chapter 15 - Mortgage Calculations and Decisions

7. While a variety of loan terms are available in a lender's mortgage menu, the most common
loan term on a level-payment mortgage is:
A. 7 years
B. 15 years
C. 30 years
D. 40 years

Difficulty: Basic
Learning Objective: 3

8. Recently, 15-year mortgages have increased in popularity amongst both borrowers and
lenders. Which of the following groups of borrowers would typically be the least interested in
a 15-year mortgage?
A. Mature households with minimal financial constraints
B. First-time homebuyers
C. Homeowners who are refinancing to obtain a lower rate than is available on a comparable
30-year mortgage
D. Homeowners who are interested in selling their property within five years

Difficulty: Intermediate
Learning Objective: 4

9. Assume that a borrower has a choice between two comparable fixed-rate mortgage loans
with the same interest rate, but different mortgage terms, one being a 30-year mortgage and
the other a 15-year mortgage. Under financially unconstrained circumstances, which of the
following statements best describes the borrower's preference?
A. The borrower would prefer the 30-year mortgage.
B. The borrower would prefer the 15-year mortgage.
C. The borrower would be indifferent between the two mortgages.
D. The borrower is unable to compare mortgage loans of two different maturities.

Difficulty: Intermediate
Learning Objective: 4

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Chapter 15 - Mortgage Calculations and Decisions

10. Partially amortizing mortgage loans require periodic payments of principal, but are not
paid off completely over the loan's term to maturity. Instead, the balance of the principal
amount is paid at maturity in what is commonly referred to as a:
A. balloon payment
B. early payment
C. up-front payment
D. payment cap

Difficulty: Basic
Learning Objective: 3

11. With the recent popularity of adjustable-rate mortgages (ARM), lenders have begun to
offer ARMs with different adjustment periods. Which of the following ARM choices will
most likely have the highest initial rate?
A. Three-year-one-year ARM
B. Five-year-one-year ARM
C. Seven-year-one-year ARM
D. Ten-year-one-year ARM

Difficulty: Intermediate
Learning Objective: 5

12. In considering a three-year-one-year adjustable-rate mortgage (ARM), the interest rate

will be fixed for how many years?
A. One year
B. Two years
C. Three years
D. Four years

Difficulty: Basic
Learning Objective: 5

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Chapter 15 - Mortgage Calculations and Decisions

13. One reason why adjustable-rate mortgages (ARMs) have become popular has to do with
the impact that they have on the interest rate risk that is borne by the parties involved. If
interest rates were to rise on a level-payment mortgage (LPM) the interest rate risk of the loan
would typically be borne by:
A. the borrower only
B. the lender only
C. both the borrower and lender
D. neither the borrower nor the lender

Difficulty: Basic
Learning Objective: 5

14. To encourage borrowers to accept adjustable rate mortgages (ARMs) rather than levelpayment mortgages, mortgage originators generally offer an initial short-term introductory
rate that is less than the prevailing market mortgage rate. This rate is referred to as a(n):
A. floating rate
B. teaser rate
C. index rate
D. discount rate

Difficulty: Basic
Learning Objective: 5

15. Given the following information on a fixed-rate loan, determine the maximum amount
that the lender will be willing to provide to the borrower. Loan Term: 30 years, Monthly
Payment: $800, Interest Rate: 6%.
A. $6,707
B. $9,295.15
C. $13,333
D. $133,433

Difficulty: Basic
Learning Objective: 1

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Chapter 15 - Mortgage Calculations and Decisions

16. Given the following information on a 30-year fixed-payment loan, determine the
remaining balance that the borrower has at the end of seven years. Interest Rate: 7%, Monthly
Payment: $1,200.
A. $17,143
B. $79,509
C. $164,402
D. $180,369

Difficulty: Intermediate
Learning Objective: 1

17. Given the following information on an interest-only mortgage, calculate the monthly
mortgage payment. Loan amount: $56,000, Term: 15 years, Interest Rate: 7.5%.
A. $169.13
B. $350
C. $519.13
D. $4,200

Difficulty: Basic
Learning Objective: 1

18. Given the following information, calculate the balloon payment for a partially amortized
mortgage. Loan amount: $84,000, Term to maturity: 7 years, Amortization Term: 30 years,
Interest rate: 4.5%, Monthly Payment: $425.62.
A. $9,458
B. $30,620
C. $73,103
D. $84,000

Difficulty: Intermediate
Learning Objective: 1

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Chapter 15 - Mortgage Calculations and Decisions

19. Given the following information, calculate the lender's yield. Loan amount: $166,950,
Term: 30 years, Interest rate: 8 %, Payment: $1,225.00, Discount points: 2.
A. 7.7%
B. 8.0%
C. 8.2 %
D. 10.0 %

Difficulty: Advanced
Learning Objective: 2

20. Given the following information, calculate the effective borrowing cost (EBC). Loan
amount: $166,950, Term: 30 years, Interest rate: 8 %, Payment: $1,225.00, Discount points: 2,
Other Closing Expenses: $3,611.
A. 7.7%
B. 8.2%
C. 8.5%
D. 9.1%

Difficulty: Advanced
Learning Objective: 2

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