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Chapter 16
Mortgage Calculations and Decisions
Test Problems
1.
The most typical adjustment interval on an adjustable rate mortgage (ARM) once
the interest begins to change is:
b. One year.
2.
A characteristic of a partially amortized loan is:
b. A balloon payment is required at the end of the loan term.
3.
If a mortgage is to mature (i.e. become due) at a certain future time without any
reduction in principal, this is called:
d. Interestonly mortgage.
4.
The dominant loan type originated by most financial institutions is the:
a. Fixedpayment, fully amortized mortgage
5.
Which of the following statements is true about 15year and 30year fixed
payment mortgages?
d. Assuming that they can afford the payments on both mortgages, borrowers
should choose a 30year mortgage over an otherwise identical 15year loan if their
discount rate (opportunity cost) exceeds the mortgage rate.
6.
Adjustable rate mortgages (ARMs) commonly have all of the following
except
:
e. Inflation index.
7.
The annual percentage rate (APR) was created in:
a. The TruthinLending Act of 1968
8.
On a levelpayment loan with 12 years (144 payments) remaining, at an interest
rate of 9% percent, and with a payment of $1,000, the balance is:
c. 87,871.
9.
On the following loan, what is the best estimate of the effective borrowing cost if
the loan is prepaid in six years?
Loan:
$100,000
Interest rate:
7 percent
Term:
180 months
Upfront costs:
7 percent of loan amount
d. 8.7 percent.
161
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View Full Document 10. Lender’s yield differs from effective borrowing costs (EBC) because:
c. EBC accounts for additional upfront expenses that lender’s yield does not.
Study Questions
1.
Calculate the original loan size of a fixedpayment mortgage if the monthly
payment is $1,146.78, the annual interest is 8.0%, and the original loan term is 15
years.
Solution
: Rounding to the nearest whole dollar, the original size of the loan is
$120,000.
This problem is solved using the following keystrokes on a financial
calculator:
N = 180
I =
8/12
PV = ?
PMT =$1,146.78
FV = 0
2.
For a loan of $100,000, at 7 percent interest for 30 years, find the balance at the
end of 4 years and 15 years.
Solution
: The loans balance at the end of 4 years and 15 years is $95,474.55, and
$74,018.87, respectively, as solved below
First, the loan payment must be calculated.
The loan payment is $665.30, as
solved below:
N = 360
I = .5833
PV = $100,000
PMT =?
FV = 0
The balance at the end of four years is $95,474.55, which is calculated by entering
the following data into a financial calculator.
N = 312
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This note was uploaded on 03/31/2008 for the course REAL 3000 taught by Professor Peng,liang during the Spring '08 term at Colorado.
 Spring '08
 PENG,LIANG

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