978-1259919688 Test Bank Chapter 4

Real Estate Finance & Investments, 16e (Brueggeman)

Chapter 4 Fixed Interest Rate Mortgage Loans

1) Inflation makes very little difference to lenders of and investors needing money.

2) Lenders and investors worry about default, interest rate, marketability, and liquidity risks.

3) 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.

4) Determining a loan balance on a CPM is a simple present value of an annuity problem.

5) The effective interest rate on a mortgage will always be higher than the stated rate of the loan.

6) Truth-in-lending requires the borrower to tell the truth on the loan application.

7) The annual percentage rate closely approximates the borrower’s true cost of funds.

8) Prepayment penalties increase the lender’s mortgage yield and discount points decrease it.

9) Origination fees are tax deductible as an interest expense.

10) Graduated payment mortgage are loans available to people who have graduated from college.

11) Borrowers with fixed rate mortgages generally benefit if actual inflation is higher than

expected inflation.

12) The APR for a loan assumes it is prepaid after ten years.

13) With a reverse mortgage the borrower receives payments from the bank.

14) A reverse mortgage can be a good option for first-time homebuyers who cannot make a

substantial down payment.

15) 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.

16) 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

17) 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

18) 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

19) 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%

20) A borrower obtains a $150,000 reverse mortgage with monthly payments over 10 years. If

the interest rate of the mortgage loan is 8%, what is the monthly payment received by the

borrower?

A) $820

B) $863

C) $1,250

D) $1,820

21) 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

22) 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

23) 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

(B)

Constant

Decreasing

(C)

Decreasing

Constant

Decreasing

(D)

Constant

A) Option A

B) Option B

C) Option C

D) Option D

24) 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

(B)

Increasing

Decreasing

Constant

(C)

Decreasing

Increasing

Constant

(D)

Constant

A) Option A

B) Option B

C) Option C

D) Option D

25) 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

26) 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

27) 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

28) Which mortgage would a borrower prefer to have during inflationary and recessionary

periods?

Inflationary

(A)

CPM

GPM

(B)

GPM

CAM

(C)

CPM

CAM

(D)

CPM

GPM

A) A

B) B

C) C

D) D

29) 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

30) 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

31) Demand for a mortgage loan is considered:

A) Stable demand

B) Derived demand

C) Interest rate demand

D) Nominal demand

32) Points are also known as:

A) Third party charges

B) Reduction in payment amount

C) Loan discount fees

D) Reduction of mortgage yield

33) APR stands for which of the following?

A) Annual percentage rate

B) Amortized percentage regulator

C) Accrued percentage rate

D) Annual percentage regulator

34) 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

35) 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

36) 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

37) 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

38) 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%