978-1259919688 Test Bank Chapter 6

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Real Estate Finance & Investments, 16e (Brueggeman)

Chapter 6 Mortgages: Additional Concepts, Analysis, and Applications

1) A borrower finds that the incremental cost of borrowing an extra $10,000 is 14%. The

borrower can earn 12% on alternative investments of comparable risk so he would be better off

by not borrowing the extra 14%.

2) A borrower finds that the incremental cost of borrowing an extra $10,000 is 14%. A second

loan can be obtained at 15% so the borrower would be better off borrowing a smaller amount on

the original loan and borrowing $10,000 with a second loan.

3) The cash equivalent value of a house that sold with favorable financing is usually less than its

sale price.

4) The effective cost of a wraparound loan should be comparable to the cost of a second

mortgage with the same loan-to-value ratio.

5) 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.

6) Homeowners should not borrow refinancing costs because the effective rate of refinancing

will be higher.

7) If interest rates decrease, the market value of a loan previously made will increase.

8) 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.

9) 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.

10) Buydown loans have initial payments that are lower than they would be without the

buydown provision.

11) A loan with biweekly payments will have more interest than a monthly loan with the same

interest rate and loan term.

12) Home equity loans do not require a mortgage lien on the property.

13) The incremental cost of borrowing may also be referred to as the marginal cost of borrowing.

14) The primary benefit of choosing biweekly mortgage payments versus monthly payments is

the savings from lowering the average amount paid each month.

15) 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%

16) 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%

17) 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

18) 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

19) 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%

20) 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%

21) When purchasing a $210,000 house, a borrower is comparing two loan alternatives. The first

loan is a 90% loan at 10.5% for 25 years. The second loan is an 85% loan for 9.75% over 15

years. Both have monthly payments and the property is expected to be held over the life of the

loan. What is the incremental cost of borrowing the extra money?

A) 20.25%

B) 16.17%

C) 11.36%

D) 12.42%

22) A borrower made a mortgage loan 7 years ago for $160,000 at 10.25% interest for 30 years.

The loan balance is now $151,806.62 and rates for this amount are currently 9.0% for 23 years.

Origination fees and closing costs are $4,500 and closing costs are not financed by the lender.

What is the effective cost of refinancing?

A) 9.00%

B) 10.85%

C) 15.32%

D) 9.39%

23) Mr. Tramp made a mortgage 5 years ago for $85,000 at 8.25% interest and a 15 year term.

Rates have now risen to 10% for an equivalent loan. Mr. Tramp’s lender is willing to discount the

loan by $2,000 if he will prepay the loan. What rate of return would Mr. Tramp receive by

prepaying the loan?

A) 10.24%

B) 8.95%

C) 14.32%

D) 9.14%

24) A loan was made 10 years ago for $140,000 at 10.5% for a 30 year term. Rates are currently

9.25%. What is the market value of the loan?

A) $128,271

B) $147,600

C) $139,828

D) $151,395

25) Bud is offering a house for sale for $180,000 with an assumable loan which was made 5

years ago for $140,000 at 8.75% over 30 years. Kelsey is interested in buying the property and

can make a $20,000 down payment. A second mortgage can be obtained for the balance at 12.5%

for 25 years. What is the effective cost of the combined loans, if Kelsey would like to compare

this financing alternative to obtaining a first mortgage for the full amount?

A) 10.63%

B) 9.39%

C) 9.04%

D) 11.27%

26) A house is sold with an assumable $156,000 below-market loan at 8.5% for a remaining term

of 15 years. Current rates are 9.75% for 15 year mortgages. If the house sold for $240,000, what

is the cash-equivalent value of the house.

A) $250,834.82

B) $229,165.18

C) $260,660.40

D) $219,339.60

27) Ms. Madison has an existing loan with payments of $782.34. The interest rate on the loan is

10.5% and the remaining loan term is 10 years. The current balance of the loan is $57,978.99.

The home is now worth $120,000 and Ms. Madison would like to borrow an additional $30,000

through a wraparound loan which would increase the debt to $87,978.99. Terms of the

wraparound loan are 12.25% interest with monthly payments for 10 years. What is the

incremental cost of borrowing the extra $30,000 through a wraparound loan?

A) 15.47%

B) 11.38%

C) 12.96%

D) 13.41%

28) Mr. Fisher has built several houses and is offering buyers mortgage rates of 10% with a 15

year term. Current rates are 10.75%. Fourth National Bank will provide the loans, if Mr. Fisher

pays an equivalent amount up front to buy down the interest rate. If a house is sold for $290,000

with a 90% loan, how much would Mr. Fisher have to pay to buy down the loan?

A) $1,957.50

B) $11,989.34

C) $11,250.25

D) $10,790.41

29) When calculating the cash equivalent value of an assumable loan, you find the present value

of the payments using the:

A) Contract interest rate

B) Incremental borrowing cost

C) Market interest rate

D) Discount rate

30) Which of the following is TRUE concerning wraparound Loans?

A) The borrower makes payments on an existing loan

B) The lender makes payments on an existing loan

C) The lender only makes payments on the second mortgage

D) The borrower only makes payments on the second mortgage

31) Which of the following is FALSE concerning buydown loans?

A) They are often used during periods of high inflation

B) They always lower the rate on the loan for the borrower for the entire loan term

C) They help borrowers qualify for a loan

D) They can be offered by home builders

32) Which of the following is TRUE regarding the incremental cost of borrowing?

A) It should be less than the rate for a first mortgage

B) It should be compared to the cost of obtaining a second mortgage

C) It is used to calculate the APR for the loan

D) It is independent of the loan-to-value ratio

33) The market value of a loan is:

A) The loan balance times one minus the market rate

B) The loan balance times one minus the original rate

C) The future value of the remaining payments

D) The present value of the remaining payments

34) Which of the following is an important aspect of the loan refinance decision process?

A) Terms associated with the existing loan

B) Terms of the new loan

C) Fees associated with paying off the old loan and/or acquiring the new loan

D) All of the above

35) Ms. Towne is buying a home for $250,000 and is putting down 20% cash on the purchase.

She is financing the rest with a 30-yr, fixed rate mortgage with a rate of 4.625%, but is

considering an option that would allow her to make biweekly payments. How much interest

would the biweekly payment option allow her to save over the life of the loan and how long

would it take to pay off the loan?

A) $29,528; 25.5 years

B) $33,234; 22.2 years

C) $29,528; 22.2 years

D) $33,234; 25.5 years