chapter016

# chapter016 - Chapter 16 Mortgage Calculations and Decisions...

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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. Interest-only mortgage. 4. The dominant loan type originated by most financial institutions is the: a. Fixed-payment, fully amortized mortgage 5. Which of the following statements is true about 15-year and 30-year fixed- payment mortgages? d. Assuming that they can afford the payments on both mortgages, borrowers should choose a 30-year mortgage over an otherwise identical 15-year 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 Truth-in-Lending Act of 1968 8. On a level-payment 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 Up-front costs: 7 percent of loan amount d. 8.7 percent. 16-1

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10. Lender’s yield differs from effective borrowing costs (EBC) because: c. EBC accounts for additional up-front expenses that lender’s yield does not. Study Questions 1. Calculate the original loan size of a fixed-payment 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.

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chapter016 - Chapter 16 Mortgage Calculations and Decisions...

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