EOCP10_102409 - CHAPTER 10 Residential Mortgage Types and...

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CHAPTER 10 Residential Mortgage Types and Borrower Decisions Test Problems 1. Private mortgage insurance (PMI) is usually required on _____ loans with loan- to-value ratios greater than _____ percent. d. Home, 80 percent. 2. The dominant loan type originated and kept by most depository institutions is the: b. Adjustable rate mortgage. 3. Which of the following mortgage types has the most default risk, assuming the initial loan-to-value ratio, contract interest rate, and all other loan terms are identical? a. Interest only loans. 4. A mortgage that is intended to enable older households to “liquify” the equity in their home is the: d. Reverse annuity mortgage. 5. A jumbo loan is: b. A conventional loan that is too large to be purchased by Fannie Mae or Freddie Mac. 6. The maximum loan-to-value ratio for an FHA loan over $50,000 is approximately: b. 97 percent. 7. The maximum loan-to-value ratio on a VA guaranteed loan is: d. 100 percent. 8. Conforming conventional loans are loans that: c. Are eligible for purchase by Fannie Mae and Freddie Mac. 9. Home equity loans typically: d. Have tax-deductible interest charges. 10. The best method of determining whether to refinance is to use: a. Net benefit analysis. 11. Probably the greatest contribution of FHA to home mortgage lending was to: a. Establish the use of the level-payment home mortgage. 1
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Study Questions 1. On an adjustable mortgage, do borrowers always prefer smaller (i.e. tighter) rate caps that limit the amount the contract interest rate can increase in any given year or over the life if the loan? Explain why or why not. Solution : Borrowers preferences are influenced by their expectations of future interest rates. For example, borrowers may prefer wider caps if they believe interest rates will not increase substantially. In this scenario, the loan interest rate will be lower because the borrower, not the lender, bears the risk of interest rates increasing. 2. Explain the potential tax advantages associated with home equity loans: Solution : Unlike interest on consumer debt, interest paid on the first $100,000 of a home equity loan is fully deductible for federal and, in some cases, state income tax purposes. By including the interest paid on a home equity loan as an itemized
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EOCP10_102409 - CHAPTER 10 Residential Mortgage Types and...

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