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Chapter 05 Making Automobile and Housing Decisions

TRUEFALSE

1. Lowballing is a sales technique where the salesperson quotes a low price for a car to get you to
make an offer, and negotiates the price upward prior to signing the sales agreement.

(A) True (B)

False

Answer : (A)

2. In a co-op, the buyer receives title to a unit and joint ownership of the common areas.

(A) True

(B) False

Answer : (B)

3. The market price of a house is $125,000, and the home buyer borrows $100,000. Two points are
equal to $2,000.

(A) True (B)

False

Answer : (A)

4. The property listing in a local multiple listing service (MLS) cannot be accessed by all buyers and
sellers.

(A) True (B)

False

Answer : (A)
5. Prequalification provides a home buyer with information regarding the specific mortgage amounts
he or she is eligible for subject to the expected changes in interest rates.

(A) True (B)

False

Answer : (A)
6. The job of a mortgage banker is to locate conventional loans for clients.

(A) True

(B) False

Answer : (B)

MULTICHOICE

7. Variable auto ownership costs are dependent on:

(A) the driver's behavior.

(B) the miles covered by the automobile.

(C) the instalment payments on car loan.

(D) the down payment.

(E) the periodic renewals of vehicle registration.

Answer : (B)

8. Which of the following is a fixed auto ownership cost?

(A) The cost of fuel

(B) The cost of oil

(C) The cost of automobile insurance

(D) The maintenance and repair costs

(E) The cost of tires

Answer : (C)

9. The loss in the value of an automobile over time is called:

(A) reinsurance.

(B) the acquisition payment.

(C) the market price.

(D) the repurchase commission.

(E) depreciation.
Answer : (E)

10. The first step in the auto-buying process should be:

(A) to test-drive several automobiles.

(B) to begin negotiations on various automobiles.

(C) to decide whether to trade in your used car or to sell it yourself.

(D) to consider alternative buying strategies.

(E) to analyze how much you can afford to spend on the car.

Answer : (E)

11. Henry has $2,500 for a down payment and thinks he can afford monthly payments of $400. If he
can finance a vehicle with an 8 percent, 3-year loan from a local bank, what is the maximum amount
Henry can spend on the car? (Round the answer to the nearest units place.)

(A) $12,765

(B) $14,400

(C) $14,079

(D) $15,265

(E) $16,879

Answer : (D)

12. Kurt has $4,500 for a down payment and thinks he can afford monthly payments of $300. If Kurt
can finance a vehicle with a 7 percent, 4-year loan from the automobile dealer, what is the maximum
amount he can afford to spend on the car? (Round off the answer to nearest units place.)

(A) $12,528

(B) $14,400

(C) $16,028

(D) $17,028

(E) $18,028

Answer : (D)

13. Jana has $1,500 for a down payment and thinks she can afford monthly payments of $300. If she
can finance a vehicle with a 7 percent, 4-year loan from a credit society, what is the maximum loan
amount Jana can afford? (Round off the answer to nearest units place.)

(A) $12,528

(B) $14,208

(C) $16,028

(D) $17,900

(E) $18,028

Answer : (A)

14. Which of the following is true of buying a used car as compared with a new car?

(A) A used car will be in a better mechanical condition compared with a new car.

(B) A used car will have a higher residual value than a new car.

(C) The accessories in a new car will be better updated compared with those fitted in a new car.

(D) Purchasing a used car will be less expensive as compared with purchasing a new car.

(E) The fuel efficiency in a used car is always higher compared with that of a new car.

Answer : (D)

15. A behavioral bias in which an individual tends to allow an initial estimate (of value or price) to
dominate the subsequent assessment (of value or price) regardless of new information to the
contrary is called .

(A) foreclosing

(B) anchoring

(C) depreciating

(D) leasing

(E) cooperating

Answer : (B)

16. Jacob has taken an SUV on lease from Free Cruisers Inc. for a period of four years. Jacob does
not need to pay any extra amount, based on the residual value of the car, at the end of the fourth
year. He has a .

(A) residual lease

(B) closed-end lease

(C) purchase option lease

(D) right to early termination lease

(E) reassignment option lease

Answer : (B)

17. The price of the car you are leasing is called the:

(A) money factor.

(B) capitalized cost.

(C) residual value.

(D) purchase option.

(E) capital cost reduction.

Answer : (B)

18. At the end of your car lease period, you intend to turn in the car, and you will not pay extra at
that time based on the residual value of the car. You have lease.

(A) a residual

(B) an open-end

(C) a purchase option

(D) a closed-end

(E) a money factor

Answer : (D)

19. Which of the following is a type of down payment that lowers the potential depreciation and
therefore your monthly lease payments on a leased car?

(A) Money factor

(B) Property depreciation cost

(C) Initial residual value

(D) Purchase option

(E) Capital cost reduction

Answer : (E)
20. When shopping for a lease, you want:

(A) a high insurance cost.

(B) a low capitalized cost.

(C) a high money factor.

(D) a low residual value.

(E) high lease payments.

Answer : (B)

21. The financing rate on a lease similar to the interest rate on a loan is called the .

(A) lease point

(B) residual rate

(C) money factor

(D) purchase option

(E) capitalized cost

Answer : (C)

22. When you receive title to an individual unit and a joint ownership of any common areas and
facilities, you have purchased a:

(A) single family home.

(B) cooperative.

(C) condominium.

(D) row house.

(E) mobile home.

Answer : (C)

23. Phil and Christina are recently married and are unsure of where they will be relocated after
Christina finishes her residency in 9 months. Based on this information, which of the following
housing recommendations would be most appropriate for them?

(A) Renting a home

(B) Buying a condominium

(C) Sharing a single-family dwelling

(D) Leasing a cooperative apartment

(E) Purchasing a trailer

Answer : (A)

24. A foreclosure happens when:

(A) the rates of interest prevalent in the housing market are extremely volatile, forcing the lender to
demand additional collateral from the borrower.

(B) the lenders attempt to recover loan balances from the insolvent borrowers by forcing the sale of
the home pledged as collateral.

(C) the borrowers repay their housing loan well before the estimated closing period of the loan.

(D) the value of a house is higher than the loan taken on the property.

(E) the borrower is planning to restructure the loan taken for making mortgage payments.

Answer : (B)

25. is a situation where homeowners owe more to the lenders than what their properties are
worth.

(A) A negative equity

(B) A foreclosure

(C) A restructure

(D) Inflation

(E) An expanded mortgage

Answer : (A)

26. When you lease your apartment from a nonprofit corporation that owns the building and you
own a share of the nonprofit corporation, you own:

(A) a single family home.

(B) a cooperative apartment.

(C) a condominium.

(D) a row house.

(E) a mobile home.

Answer : (B)
27. As home prices have fallen in recent years, the rent ratio:

(A) and rent attractiveness have increased.

(B) and rent attractiveness have decreased.

(C) has increased and rent attractiveness has decreased.

(D) has decreased and rent attractiveness has increased.

(E) has increased and rent attractiveness has stabilized.

Answer : (B)

28. If you made a down payment of $11,000 on a house worth $110,000, the lenders will require
because of the size of the down payment.

(A) closing points

(B) a bond

(C) private mortgage insurance

(D) application fees

(E) homeowner's insurance

Answer : (C)

29. Fees charged by lenders as a condition of a mortgage loan that raises the effective rate of
interest are called:

(A) mortgage points.

(B) down payments.

(C) add-on charges.

(D) commissions.

(E) loan discounts.

Answer : (A)

30. If the maximum loan-to-value ratio that a lender will accept on a house costing $100,000 is 80
percent, then the borrower must make a down payment of at least

(A) $100,000.

(B) $80,000.

(C) $180,000.
(D) $20,000.

(E) $120,000.

Answer : (D)

31. An escrow account is used to collect from one's monthly mortgage payment.

(A) interest

(B) principal

(C) real estate taxes

(D) closing costs

(E) operating expenses

Answer : (C)

32. Barb and Bob want to purchase a new home but don't know how much mortgage they can
qualify for. The lender requires that the total installment of loan payments do not exceed 35 percent
of the monthly income. Based on Barb and Bob's financial data given below, what is the maximum
monthly mortgage payment for which they can qualify?
Monthly Gross Income $4,000
Car payment $350
Student loan payment $200

(A) $1,400

(B) $1,208

(C) $1,502

(D) $850

(E) $500

Answer : (D)

33. The majority of each monthly payment at the beginning of the loan goes to pay the:

(A) principal.

(B) interest.

(C) real estate taxes.

(D) homeowner's insurance.

(E) private mortgage insurance.

Answer : (B)

34. If you purchase a house worth $110,000 and make a 10 percent down payment, how much would
1 mortgage point cost at closing?

(A) $765

(B) $990

(C) $1,100

(D) $1,530

(E) $1,800

Answer : (B)

35. Which of the following are tax deductible if one itemizes deductions?

(A) Principal, interest, real estate taxes, and insurance

(B) Principal, interest, and real estate taxes

(C) Principal and interest

(D) Interest, real estate taxes, and insurance

(E) Interest and real estate taxes

Answer : (E)

36. Most homeowners get financial benefit from owning a home as it results in:

(A) the creation of a recession proof liability.

(B) saving tax liability by tax evasion.

(C) tax savings due to tax shelter.

(D) reducing non-depreciating assets.

(E) adding to the hidden costs of mortgage payments.

Answer : (C)

37. are the expenses that borrowers pay when a mortgage loan is closed and they receive title
to the purchased property.

(A) Amortization costs

(B) Closing costs

(C) Property taxes

(D) Insurance costs

(E) Mortgage interests

Answer : (B)

38. Jackie is in the 28 percent marginal tax bracket and has no other itemized deductions except
those related to her home. If she is eligible for a standard deduction worth $6,100 and she incurs the
following costs related to housing, how much tax savings will she receive as a result of her home
purchase?
Mortgage interest $14,000
Principal repayment $ 800
Homeowner's insurance $ 1,000
Real estate taxes $ 4,000
Homeowner's association fees $ 1,200

(A) $13,250

(B) $5,040

(C) $3,332

(D) $2,800

(E) $0

Answer : (C)

39. If the maximum loan-to-value ratio that a lender will accept on a house costing $100,000 is 90
percent, then the borrower must make:

(A) a minimum down payment of $10,000 plus closing costs.

(B) a minimum down payment of $10,000 including closing costs .

(C) a maximum down payment of $10,000 including closing costs and mortgage points.

(D) a maximum down payment of $10,000.

(E) a minimum down payment of $90,000 including closing costs.

Answer : (A)

40. A lender will usually require a loan-to-value ratio of or less for a borrower to avoid having
to pay private mortgage insurance (PMI).

(A) 75%

(B) 80%

(C) 85%
(D) 90% (E)

95% Answer

: (B)

41. A real estate sales contract will include:

(A) the amount you have paid as an earnest money deposit.

(B) the terms of a mortgage loan taken from a third party.

(C) the future value of similar properties in foreign countries.

(D) the movement in the value of the property over the last 20 years.

(E) the current value of the properties in the neighboring locations.

Answer : (A)

42. The data in a multiple listing service (MLS):

(A) eliminates the need for a real estate agent.

(B) is accessible to the buyers and sellers directly.

(C) includes the entire ownership history of the listed properties.

(D) deals only with undervalued properties that are authorized by the government within a
geographic location.

(E) consists of a comprehensive listing of properties for sale in a given community area.

Answer : (E)

43. The governs closings on owner-occupied houses, condominiums, and apartment buildings
of four units or fewer.

(A) Equal Credit Opportunity Act

(B) Truth-in-Lending Act

(C) Real Estate Settlement Procedures Act

(D) Mortgage Lenders Act

(E) Real Estate Agents Act

Answer : (C)

44. Fredrick purchased a property worth $150,000 on mortgage. He had paid $30,000 as a down
payment on this property. However, because of a recent slump in the real estate prices, the property
is worth only $110,000, forcing Fredrick to sell the property. Assuming that no mortgage payments
have been made by Fredrick, this sale is termed a(an) .

(A) real estate declining equity

(B) real estate short sale

(C) fixed mortgage sale

(D) shrinking principal sale

(E) indexed equity

Answer : (B)

45. Jane and Smith are considering the purchase of a home in downtown Minneapolis. They
approached Larson's Mortgagers Inc. to arrange for the financing needed for their home. This
process of arranging with a mortgage lender in advance of buying a home is called .

(A) foreclosure

(B) contingency auction

(C) prequalification

(D) real estate short sale

(E) diversification

Answer : (C)

46. Which of the following will help a buyer know ahead of time the specific mortgage amount that
he or she will be eligible for subject to changes in rates and term?

(A) Prequalification

(B) The rent ratio

(C) Leasing

(D) Anchoring

(E) The interest rate

Answer : (A)

47. If the interest rates and monthly mortgage payments do not change over the life of your
mortgage, you have .

(A) a reverse-annuity mortgage

(B) a fixed-rate mortgage

(C) an adjustable-rate mortgage

(D) a rollover mortgage

(E) a graduated-payment mortgage

Answer : (B)

48. The monthly interest on your adjustable-rate mortgage was $690. You paid $650 as your
monthly payment on the loan leading to an increase in the principal balance. This is an example of:

(A) a growing equity.

(B) a negative amortization.

(C) a fixed interest expense.

(D) a shrinking principal.

(E) an indexed equity.

Answer : (B)

49. A buydown refers to:

(A) a mortgage that starts with unusually low payments that rise over several years to a fixed
payment.

(B) financing made available by a builder or seller to a potential new-home buyer at well below
market interest rates, often only for a short period.

(C) a fixed-rate mortgage with payments that increase over a specific period.

(D) a mortgage that requires the borrower to pay only interest; typically used to finance the
purchase of more expensive properties.

(E) a loan on which payments that equal half the regular annual interest amount are made every six
months.

Answer : (B)

50. The Federal Housing Administration to high loan-to-value ratio mortgages.

(A) guarantee

(B) insurance

(C) subsidies
(D) grants

(E) tax shelters

Answer : (B)

51. are loans offering low payments for the first few years, gradually increasing until year
three or five, and then remaining fixed.

(A) Reverse-annuity mortgages

(B) Fixed-rate mortgages

(C) Adjustable-rate mortgages

(D) Graduated-payment mortgages

(E) Rollover mortgages

Answer : (D)

52. The biggest fixed cost of owning a car is likely to be the .

(A) loan payments

(B) fuel costs

(C) cost of license and renewals

(D) maintenance charges

Answer : (A)

53. Assume that you have taken a car on a closed-end lease for a period of 5 years. At the end of the
fifth year, you would need to pay additional money only .

(A) when the residual value is lower than expected

(B) when the residual value is more than expected

(C) when the mileage limits are exceeded

(D) when the mileage limits are not exceeded

Answer : (C)

54. Janet is considering the purchase of a condo for $150,000 during a recession phase, partly
financed by a mortgage. She is due to retire in a few years. If she cannot make her mortgage
payments on time, she is bound to incur a .
(A) neutral equity on her property

(B) reduced residual value of the property

(C) higher rent ratio

(D) foreclosure of her house

Answer : (D)

55. The purchase price of the house you are buying is $140,000. A loan-to-value ratio of 80 percent
will require a down payment of .

(A) $34,000

(B) $28,000

(C) $108,000

(D) $112,000

Answer : (B)

56. are ongoing costs of home ownership.

(A) Down payments

(B) Closing costs

(C) Taxes on capital gains

(D) Property taxes and insurance

Answer : (D)

57. If your lender charges 1.5 mortgage points on a house selling for $100,000, on which there is a
$90,000 loan, the points will cost you .

(A) $1,350

(B) $1,500

(C) $2,850

(D) $150

Answer : (A)

58. A(n) ratio specifies the maximum percentage of the value of a property that a lender
is willing to loan.
(A) affordability

(B) loan-to-value

(C) rent

(D) mortgage points to closing costs

Answer : (B)

59. The seller of the house typically pays the .

(A) appraisal fee.

(B) loan application fee

(C) real estate agent's commission.

(D) title search and insurance.

Answer : (C)

60. Earnest money is the sum of money the home buyer pledges with the .

(A) lender to guarantee the purchase

(B) seller to indicate the intent of purchase

(C) realtor for finding the desired home within a preset budget

(D) lender to originate the loan

Answer : (B)

61. The Act governs closings on owner-occupied houses, condominiums, and apartment
buildings of four units or fewer.

(A) Equal Credit Opportunity

(B) Truth-in-Lending

(C) Real Estate Settlement Procedures

(D) Mortgage Lenders

Answer : (C)

62. The Real Estate Settlement Procedures Act governs on owner-occupied houses,
condominiums, and apartment buildings of four units or fewer.

(A) mortgage closings

(B) mortgage rates

(C) the contingency clause

(D) the terms of prequalified loans

Answer : (A)

63. Matt is considering the purchase of a condo on a mortgage. However, he is not sure of the
amount of the mortgage he is eligible for. will help him identify and correct any
problems such as credit report errors that may arise on his application.

(A) Prequalification

(B) A contingency clause

(C) A Multiple Listing Service

(D) Due diligence

Answer : (A)

64. With prequalification, a buyer can .

(A) always negotiate a price lower than the quoted price on the property

(B) set right in advance any problems on his credit report

(C) get a comprehensive list of all the suitable properties in a locality

(D) bargain for additional time in a property deal for the want of funds

Answer : (B)

65. The real estate agent's commission is generally paid by .

(A) the seller

(B) the buyer

(C) the mortgage bank

(D) the local multiple listing service provider

Answer : (A)

66. A financing made available by a builder or seller to a potential new-home buyer at interest rates
well below market interest rates, often only for a short period is termed as a .

(A) conventional mortgage

(B) convertible ARM

(C) buydown

(D) two-step ARM

Answer : (C)

67. A veteran might be able to buy a home with no down payment with .

(A) an FHA mortgage insurance

(B) a VA loan guarantee

(C) a buydown

(D) a conventional mortgage

Answer : (B)

68. You made a $900 mortgage payment. The interest of $925 on the mortgage for this month leads
to an increase in the principal balance. You have .

(A) experienced a negative amortization

(B) signed up for a conventional mortgage

(C) refinanced your loan

(D) taken a fixed-rate mortgage

Answer : (A)

ESSAY

69. Greg has negotiated a $20,000 price on a new pickup truck. The manufacturer is offering a
$1,500 rebate or 3.9 percent, three-year financing. Greg is also able to get 7 percent, three-year
financing from his credit union. If Greg plans to finance $18,000 over three years, should he take the
3.9 percent financing or the 7 percent financing? Show all work and round your answers to two
decimal places.

Graders Info :

Calculation of PMT for 3.9%, three-year financing from the manufacturer:PV = 18,000, I = 3.9% / 12
= 0.33%, N = 36, PMT = 530.63
Calculation of PMT for 7%, three-year financing from the credit union:
PV = 18,000, I = 7% / 12 = 0.58%, N = 36, PMT = 555.79
Greg's savings per month, if he chooses the 3.9% loan over the 7% loan = $555.79 - $530.63 =
$25.16
Greg's savings for the three-years of the loan = $25.16 × 36 = $905.63
As Greg would be able to save only $905.63 over a three-year period as compared to the $1,500
rebate he gets from the manufacturer, he must take the rebate of $1,500 offered by the seller and
finance his purchase through the 7 percent loan from the credit union.

70. Judy has $2,000 for a down payment on a vehicle and she can afford monthly payments of $400.
If lenders are currently offering 6 percent interest on 5-year loans, what is the maximum price Judy
can pay for a vehicle?

Graders Info :

In order to calculate how much Judy can afford on her vehicle, first calculate the present value of the
loan for a period of 5 years.To calculate the PV, consider the following arguments:
PMT = $400, I = 6% / 12 months = 0.5%, N = 5 years × 12 months = 60 months
PV= $20,690.22
Judy can afford a total of $22,690 for a vehicle. It is the sum of $2,000 as down payment and $20,690
over a period of 5 years to purchase a new car.

71. Leslie has been offered the choice of either a $1,000 rebate or a 5.5 percent, 48-month loan for
the new car she is purchasing. If Leslie will be financing $15,000 and can get a 7.5 percent, 48-
month loan at her credit union, should she take the $1,000 rebate or the 5.5 percent loan? (Show all
work.)

Graders Info :

Calculation of PMT for 7.5%, 48-month loan from the credit union:PV = 15,000, I = 7.5% / 12 =
0.625%, N = 48, PMT = 362.68
Calculation of PMT for 5.5%, 48-month loan from the manufacturer:
PV = 15,000, I = 5.5% / 12 = 0.45%, N = 48, PMT = 348.85
Leslie's savings if she chooses the 7.5% loan for a period of 48 months = (362.68 - 348.85) × 48 =
664.15
As the amount of savings is less than the rebate of $1,000 Leslie will receive, she must take the
rebate of $1,000.

72. Dick and Jane have just purchased a house and are calculating how much money they will need
when the closing day rolls around. The purchase price is $200,000. They will make a 20 percent
down payment, and they must pay 2 points on the loan. Closing costs should be 3 percent of the
purchase price. What is the total dollar amount they will need at closing? (Show all work.)

Graders Info :
The total dollar amount they will need at closing is $49,200.Total amount needed at closing = Down
payment + Points + Closing costs
Down payment = 20% × $20,000 = $40,000
Points = 2% × ($200,000 - $40,000) = $3,200
Closing costs = 3% × $200,000 = $6,000
Total amount needed at closing = $40,000 + $3,200 + $6,000 = $49,200