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CHAPTER 4

Fixed Interest Rate Mortgage Loans


TRUE/FALSE
1. Inflation makes very little difference to lenders of and investors needing money. (F)
2. Lenders and investors worry about default, interest rate, marketability, and liquidity risks. (T)
3. One difference between the constant amortizing mortgage (CAM) and the constant payment
mortgage (CPM) is the interest paid and loan amortization relationship. With a CAM, the
loan amortization and interest paid are directly related and with the CPM the loan
amortization and the interest paid are inversely related. (T)
4. Determining a loan balance on a CPM is a simple future value of an annuity problem. (F)
5. With every CPM, the effective costs of borrowing are higher than the stated rate of the loan.
(F)
6. Truth-in-lending requires the borrower to tell the truth on the loan application. (F)
7. The annual percentage rate, disclosed at the loan closing, closely approximates the
borrowers true cost of funds. (F)
8. Prepayment penalties increase the lenders mortgage yield and discount points decrease it.
(F)
9. Origination fees are tax deductible as an interest expense. (F)
10. Graduated payment mortgage are loans available to people who have graduated from
college. (F)
11. Borrowers with fixed rate mortgages generally benefit if actual inflation is higher than
expected inflation. (T)
12. The APR for a loan assumes it is prepaid after ten years. (F)
13. With a reverse mortgage the borrower receives payments from the bank. (T)
MULTIPLE CHOICE
14. A borrower takes out a 30-year mortgage loan for $250,000 with an interest rate of 5%.
What would the monthly payment be? (C)
(A) $694
(B) $1,042
(C) $1,342
(D) $1,355
(E) Not enough information
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15. A borrower takes out a 30-year mortgage loan for $250,000 with an interest rate of 5% and
monthly payments. What portion of the first months payment would be applied to interest?
(B)
(A) $694
(B) $1,042
(C) $1,342
(D) $1,355
(E) Not enough information
16. A borrower has a 30-year mortgage loan for $200,000 with an interest rate of 6% and
monthly payments. If she wants to pay off the loan after 8 years, what would be the
outstanding balance on the loan? (D)
(A) $84,886
(B) $91,246
(C) $146,667
(D) $175,545
(E) Not enough information
17. A borrower takes out a 30-year mortgage loan for $100,000 with an interest rate of 6% plus
4 points. What is the effective annual interest rate on the loan if the loan is carried for all 30
years? (C)
(A) 5.6%
(B) 6.0%
(C) 6.4%
(D) 6.6%
18. A borrower obtains a $150,000 reverse mortgage with monthly payments over 10 years. If
the interest rate of the mortgage loan is 8%, what is the monthly payment received by the
borrower? (A)
(A) $820
(B) $863
(C) $1,250
(D) $1,820
19. Which of the following is NOT a determinant of interest rates for single family residential
mortgages? (D)
(A) The demand and supply of mortgage funds
(B) Inflation expectations
(C) Liquidity
(D) The demand and supply of apartments
20. Risk is an important component of interest rates. Which of the following risks is NOT a
determinant of interest rates? (C)
(A) Default risks
(B) Interest rate risks
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(C) Institutional risks


(D) Marketability risks
21. One of the first amortizing mortgages was the constant amortization mortgage. Which of the
following characterized the components of the CAM payment over the life of the loan? (C)
Interest
(A) Decreasing
(B) Constant
(C) Decreasing
(D) Constant

Amortization
Decreasing
Decreasing
Constant
Constant

Payment
Decreasing
Decreasing
Decreasing
Constant

22. One of the most popular amortizing mortgages today is the constant payment mortgage.
Which of the following characterizes the components of the CPM payment over the life of
the loan? (C)
Interest
(A) Decreasing
(B) Increasing
(C) Decreasing
(D) Constant

Amortization
Decreasing
Decreasing
Increasing
Constant

Payment
Decreasing
Constant
Constant
Constant

23. In comparison to the first months payment of a CAM, the first months payment of a CPM:
(B)
(A) Is higher
(B) Is lower
(C) Is the same
(D) Cannot be determined with this information
24. At the end of five years, calculating the loan balance of a constant payment mortgage is
simply the: (C)
(A) Present value of a single amount
(B) Future value of a single amount
(C) Present value of an ordinary annuity
(D) Future value of an ordinary annuity
25. Which of the following closing costs do not increase the lenders effective loan yield? (C)
(A) Discount points
(B) Prepayment penalties
(C) Title insurance charges
(D) Origination fees
26. Which mortgage would a borrower prefer to have during inflationary and recessionary
periods? (C)
(A)
(B)

Inflationary
CPM
GPM

Recessionary
GPM
CAM
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(C)
(D)

CPM
CPM

CAM
GPM

27. Over the life of the loan, which of the following loans would continually have a lower principal
balance given each loan had the same term, principal amount, and average interest rate?
(A)
(A) CAM
(B) CPM
(C) GPM
(D) Cannot be determined with this information
28. Because its payment stream looks like a staircase, which loan is sometimes referred to as
stepped-up financing due to prearranged payment increases? (C)
(A) CAM
(B) CPM
(C) GPM
(D) ARM
29. Demand for a mortgage loan is considered: (B)
(A) Stable demand
(B) Derived demand
(C) Interest rate demand
(D) Nominal demand
30. Points are also known as: (C)
(A) Third party charges
(B) Reduction in payment amount
(C) Loan discount fees
(D) Reduction of mortgage yield
31. APR stands for which of the following? (A)
(A) Annual percentage rate
(B) Amortized percentage regulator
(C) Accrued percentage rate
(D) Annual percentage regulator
32. Assuming all APRs equal, the effective interest rate on a loan is highest when: (D)
(A) The loan has no points and a 30 year maturity and is prepaid in five years
(B) The loan has no points and is prepaid at maturity
(C) Points are charged and the loan is paid off at maturity in 30 years
(D) Points are charged and the loan has a 30 year maturity but prepaid in five years
33. Which one of the following is TRUE about Prepayment penalties: (D)
(A) They are never used with residential mortgages
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(B) They lower the effective cost if the loan is repaid before maturity
(C) They are equivalent to charging additional points for the loan
(D) They are not included in the APR calculation

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