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You are on page 1of 12

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.

15-1

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

15-2

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

will be fixed for how many years?

A. One year

B. Two years

C. Three years

D. Four years

15-3

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

15-4

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%

15-5

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

15-6

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

15-7

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

15-8

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

will be fixed for how many years?

A. One year

B. Two years

C. Three years

D. Four years

Difficulty: Basic

Learning Objective: 5

15-9

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

15-10

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

15-11

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

15-12

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