Question

1. Assuming APRs are equal, the effective interest rate on a loan is highest when:

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 paid off at maturity in 30 years

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

2. Which is NOT a component of an adjustable rate mortgage (ARM)?

1. A margin
2. An index
3. A chapter
4. Caps

3. You entered into a 30-year, $250,000 ARM with monthly repayments.  The initial interest rate is 6%, with applicable interest rate reset every two years.  What the monthly payment during the first year?

1. $18,162.23
2. $15,000.00
3. $1,498.88
4. $8,994.73

4. Under which scenario is negative amortization likely to occur when you borrow under an ARM?

Payment Cap                Interest Rates

A)        None                            Increasing

B)        None                            Decreasing

C)        7.5%                            Increasing

D)        7.5%                            Decreasing

5. A house is for sale for $250,000.  You have a choice of two 20-year mortgage loans with monthly payments: (1) if you make a down payment of $25,000, you can obtain a loan with a 6% rate of interest or (2) if you make a down payment of $50,000, you can obtain a loan with a 5% rate of interest.  What is the effective annual rate of interest on the additional $25,000 borrowed on the first loan?

1. 1.00%
2. 6.00%
3. 12.95%
4. 18.67%

Answer 1

• Assuming APRs are equal, the effective interest rate on a loan is highest when:

Ans : A) The loan has no points and a 30-year maturity and is prepaid in five years

• Which is NOT a component of an adjustable rate mortgage (ARM)?

Ans : C) A chapter

• You entered into a 30-year, $250,000 ARM with monthly repayments.  The initial interest rate is 6%, with applicable interest rate reset every two years.  What the monthly payment during the first year?

Ans : D) $8,994.73

• Under which scenario is negative amortization likely to occur when you borrow under an ARM?

Ans :  C)    Payment Cap - 7.5%                    Interest Rates - Increasing

• A house is for sale for $250,000.  You have a choice of two 20-year mortgage loans with monthly payments: (1) if you make a down payment of $25,000, you can obtain a loan with a 6% rate of interest or (2) if you make a down payment of $50,000, you can obtain a loan with a 5% rate of interest.  What is the effective annual rate of interest on the additional $25,000 borrowed on the first loan?

Ans : C) 12.95%

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