BUSI 422 Quiz 2 Adjustable-Rate Mortgages and Residential Housing Liberty
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A self-employed borrower who has documentable assets but is not able to
provide adequate documentation for his income may be eligible for which type of
loan?
Which of the following organizations provides lenders with complete protection
against default losses?
Which of the following is NOT typically included in housing costs used to
calculate a borrower’s payment-to-income ratio?
What document usually summarizes the sources, disbursements, charges and
credits associated with a real estate closing?
In order to avoid the requirement to purchase private mortgage insurance when
the LTV is greater than 80 percent, a buyer may be able to take out a first
mortgage for 80 percent or less and couple it with a second mortgage to account
for the remainder of the necessary funds.
A borrower who was required to purchase private mortgage insurance as a
condition of their mortgage should be able to eliminate that requirement if the
LTV of a home is proven to have dropped to less than 85 percent.
Financing costs are usually paid by the lender to either the borrower/buyer or the
seller.
GSE is the abbreviation for:
A jumbo loan:
RESPA requires lenders to disclose to buyers a good faith estimate of certain
closing costs within:
RESPA requires a lender to disclose good faith estimates of closing costs within
three days of loan application.
A property is purchased for $200,000 with an 80 percent LTV. After five years,
the owner's equity is $80,000. What would be the approximate annual expected
appreciation rate on home equity?
Which of the following is NOT a factor in causing a property to become
distressed?
Which of the following statements best describes the "wealth effect"?
When calculating taxes, the difference between the acquisition cost and selling
price of a house is called:
Cluster analysis using location quotients and/or employment multipliers provides
a snapshot of employment at a point in time but does not provide a forecast of
future employment in a specific industry.
A home sales transaction in which the seller was not under undue pressure to
sell for a discounted or inflated price (e.g., foreclosure, selling to family member,
etc.) is referred to as a(n):
Which of the following is NOT tax deductible for homeowners?
When considering the federal income tax treatment for housing, which of the
following is tax deductible?
Population increases are usually associated with increases in demand and house
price appreciation.
Potential investors, in analyzing the profit potential for a distressed property,
generally consider a financial framework including the acquisition phase, the
holding period phase, and the disposition phase.
Comparable properties must be chosen from those homes that have been sold or
have been listed for sale most recently, and that are located in the same city as
the subject property.
Ms. Towne is buying a home for $250,000 and is putting down 20 percent cash
on the purchase. She is financing the rest with a 30-year, fixed rate mortgage
with a rate of 4.625 percent, 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?
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 percent 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 percent for 25 years.
What is the effective cost of the combined loans that Kelsey can use to compare
this financing alternative to obtaining a first mortgage for the full amount?
Which of the following statements concerning a 30-year, $150,000 loan at 7
percent with monthly payments is true if, 15 years later, an investor wants to
purchase the loan and market interest rates are 5 percent?
A loan was made 10 years ago for $140,000 at 10.5 percent for a 30-year term.
Rates are currently 9.25 percent. What is the market value of the loan?
The primary benefit of choosing biweekly mortgage payments versus monthly
payments is the savings from lowering the average amount paid each month.
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.
Which of the following is an important aspect of the loan refinance decision
process?
The incremental cost of borrowing may also be referred to as the marginal cost
of borrowing.
Which of the following is FALSE concerning buydown loans?
The market value of a loan is the:
Home equity loans do not require a mortgage lien on the property.
A borrower takes a 30-year fully amortizing 5/1 ARM for $225,000 with an initial
interest rate of 4.375 percent. Assuming the index on which the loan rate is
based rises by 1 percent in the fourth year of the loan and remains at that level,
what will the payment be in the sixth year of loan?
A borrower takes out a 30-year adjustable rate mortgage loan for $200,000 with
monthly payments. The first two years of the loan have a "teaser" rate of 4
percent, after that the rate can reset with a 5 percent annualHpaymentHcap. On
the reset date, the composite rate is 6 percent. Assume that the loan allows for
negative amortization. What would be the outstanding balance on the loan at the
end of Year 3?
What is the meaning of “interest is capped at 2%/5%”?
LOAN 1 LOAN 2 LOAN 3 LOAN 4
Initial Interest Rate ????
Loan Maturity (years) 20 20 20 20
% Margin Above Index 3% — 3% 3%
Adjustment Interval 1 year — 1 year 1 year
Points 1% 1% 1% 1%
Interest Rate Cap NONE — 1%/year 3%/year
With which loan in the above table does the lender have the lowest
interest rate risk?
A borrower with an interest-only loan may end up owing more at the end of the
loan than the original loan amount.
An ARM may also be referred to as a floating payment loan.
If one of the terms of an ARM read “interest is capped at 2%/5%”, what would
that mean?
Negative amortization reduces the principal balance of a loan.
A potential home buyer is wondering about her credit card
accounts and the effect that they may have on her credit score
which will be evaluated when she applies for a mortgage loan. At
present, she has three accounts with credit limits and balances
outstanding as follows:
She would like to transfer the balance in account #2 to account
#3 in order to save the membership fee and because the interest
charges for account #2 are higher than the others. If she does
this account #2 would be closed.
Account Limit Outstanding Balance
(1) $ 5,000 $3,150
(2) 10,000 5,150
(3) 15,000 8,150
Required:
a. How much credit capacity is she currently using?
b. If she cancels account number 2 and transfers the balance to
account number 3, what will be the capacity used now?
c. After the transfer, how much would an increase in the total
credit limit have to be in account number 3 to restore the total
capacity used in all accounts prior to the transfer?
You are trying to estimate the value of a property that you are
interested in buying. The subject property is located at 322 Rock
Creek Road in a new suburb of a large metropolitan area. The
property is like many others in the area, with three bedrooms, two
baths, a living room, a den, a large kitchen, and a two-car garage.
The residence has about 1,800 square feet of air-conditioned
space and is of traditional design. The property is located on an
interior lot with no potential flooding problems. The quality of
construction appears to be about average for the market area.
The property being purchased was built within the past two years.
Three properties have been chosen as comparables and they also
were constructed within the past two years.
Comparable properties in the area have the following
characteristics:
Comparable I Comparable II Comparable Ill
Address 123 Clay Street 301 Cherry Lane 119 Avenue X
Sale price $ 98,400 $ 91,400 $ 87,000
Time of sale 6 months ago 7 months ago 13 months ago
Design Modern Traditional Traditional
Parking 2-car garage 2-car carport 1-car garage
Location Corner lot Interior lot Interior lot
Drainage Good Below average Good
Bedrooms Four Three Two
Baths Two Two Two
Construction Average Average Below average
You have come to some conclusions concerning what you believe
the different attributes of the comparable properties are likely to
be worth in the market area. Appreciation in house values in the
area has been very low over the past eight months, and you think
that any properties that have sold within that period would
probably not require any adjustments for the time of sale.
However, one of the comparable properties sold over a year ago,
and you think it will require a $1,740 upward adjustment. You also
believe that properties in the area that are located near the creek
sell for about $1,440 less than other properties in the area
because of a slower rate of runoff after heavy rains. Properties on
corner lots generally sell for a premium of about $1,240. Houses
with the fashionable modern design usually bring about $1,240
more than those that have traditional design characteristics.
Because three-bedroom homes are considered desirable by
buyers in the area, an additional fourth bedroom will generally
only add about $1,500 in value to a property. However, properties
that contain only two bedrooms are rather difficult to sell, and
often bring $2,240 less than their three-bedroom counterparts
when they are sold. Most homes in the area have a two-car
garage, but when properties have a one-car garage, they usually
sell for about $1,040 less. A two-car open carport generally
reduces the value of the property by a similar amount, or $1,100.
The inferior construction quality exhibited by comparable III
should reduce its value by about $1,740.
Required:
a. Complete the sales comparison approach to value and assign
an estimate of value to the subject property.
b. A second approach using the cost method of valuation will also
be used to estimate value. Comparing vacant lot sales in the
market area indicates that the value of the lot the subject
property is constructed on is $19,000. Air-conditioned space in
the dwelling would cost about $36.00 per square foot to
reproduce, and the garage would cost approximately $4,300 to
reproduce. Complete the cost approach to value, assuming that,
because the property being valued is relatively new, no
depreciation of the structure is required.
An appraiser is looking for comparable sales and finds a property
that recently sold for $230,000. She finds that the buyer was able
to assume the seller’s fully amortizing mortgage, which had
monthly payments based on a 7 percent interest. The balance of
the loan at the time of sale was $150,000 with a remaining term
of 15 years (monthly payments). The appraiser determines that if
a $150,000 loan was obtained on the same property, monthly
payments at the market rate for a 15-year fully amortizing loan
would have been 8 percent with no points.
Required:
a. Assume that the buyer is expected to benefit from the interest
savings on the assumable loan for the entire loan term. What is
the cash equivalent value of the property?
b. What is the cash equivalent value of the property if you
assumed that the buyer is only expected to benefit from interest
savings for five years because he would probably sell or refinance
after five years?
An ARM for $101,400 is made at a time when the expected start
rate is 5 percent. The loan will be made with a teaser rate of 2
percent for the first year, after which the rate will be reset. The
loan is fully amortizing, has a maturity of 25 years, and payments
will be made monthly.
Required:
a. What will be the payments during the first year?
b. Assuming that the reset rate is 6 percent at the beginning of
year (BOY) 2, what will the payments be?
c. By what percentage will the monthly payments increase?
d. If the reset date is three years after loan origination and the
reset rate is 6 percent, what will the loan payments be beginning
in year 4 through year 25?
A 3/1 ARM is made for $163,000 at 7 percent with a 30-year
maturity.
Required:
a. Assuming that fixed payments are to be made monthly for
three years and that the loan is fully amortizing, what will be the
monthly payments? What will be the loan balance after three
years?
b. What would new payments be beginning in year 4 if the
interest rate fell to 6 percent and the loan continued to be fully
amortizing?
c. In (a) what would monthly payments be during year 1 if they
were interest only? What would payments be beginning in year 4
if interest rates fell to 6 percent and the loan became fully
amortizing?
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