Multiple Choice Questions

[QUESTION]
1. The monthly mortgage payment divided by the loan amount is commonly referred to as the:
A. loan balance
B. effective borrowing cost
C. lenders yield
D. monthly loan constant
Ans: D
Difficulty: Basic
Learning Objective: 1
[QUESTION]
2. From the borrowers perspective, the effective borrowing cost is often viewed as the
implied internal rate of return (IRR), since it takes into consideration costs that the borrower
faces, but which are not passed on as income to the lender. Included in this calculation are
certain closing costs, which may consist of all of the following EXCEPT:
A. Title insurance
B. Mortgage insurance
C. Recording fees
D. Earnest money
Ans: D
Difficulty: Intermediate
Learning Objective: 2
[QUESTION]
3. Required by the Truth-in-Lending Act, the annual percentage rate (APR) is reported by the
lender to the borrower on virtually all U.S. home mortgage loans. The APR accounts for all of
the following EXCEPT:
A. All finance charges in connection with the loan, such as discount points, origination fees,
and underwriting fees.
B. All compensation to the originating brokers if one was used by the borrower.
C. Any prepayment of principal to be made on the loan.
D. Premiums for required forms of insurance
Ans: C
Difficulty: Intermediate
Learning Objective: 2
[QUESTION]
4. When lenders charge discount points (prepaid interest) on a loan, what impact does this
have on the loans yield?
A. The yield on the loan will increase.
B. The yield on the loan will decrease.
C. The yield on the loan will be unaffected.

D. The yield on the loan automatically becomes zero.

Ans: A
Difficulty: Basic
Learning Objective: 2
[QUESTION]
5. For the purposes of estimating the effective borrowing cost (EBC), only those up-front
expenses associated with obtaining the mortgage should be included, not the settlement costs
associated with obtaining ownership of the property. With this in mind, which of the
following costs should not be included in ones calculation of EBC?
A. Discount points
B. Loan origination fees
C. Appraisal fee
D. Buyers title insurance
Ans: D
Difficulty: Basic
Learning Objective: 2
[QUESTION]
6. When fully amortizing loans call for equal periodic payments over the life of the loan they
are known as:
A. level-payment mortgages
B. adjustable-rate mortgages
C. interest-only mortgages
D. early-payment mortgages
Ans: A
Difficulty: Basic
Learning Objective: 3
[QUESTION]
7. While a variety of loan terms are available in a lenders mortgage menu, the most common
loan term on a level-payment mortgage is:
A. 7 years
B. 15 years
C. 30 years
D. 40 years
Ans: C
Difficulty: Basic
Learning Objective: 4
[QUESTION]
8. Recently, 15-year mortgages have increased in popularity amongst both borrowers and
lenders. Which of the following groups of borrowers would typically be the least interested in

a 15-year mortgage?
A. Mature households with minimal financial constraints
B. First-time homebuyers
C. Homeowners who are refinancing to obtain a lower rate than is available on a comparable
30-year mortgage
D. Homeowners who are interested in selling their property within five years
Ans: B
Difficulty: Intermediate
Learning Objective: 4
[QUESTION]
9. Assume that a borrower has a choice between two comparable fixed-rate mortgage loans
with the same interest rate, but different mortgage terms, one being a 30-year mortgage and
the other a 15-year mortgage. Under financially unconstrained circumstances, which of the
following statements best describes the borrowers preference?
A. The borrower would prefer the 30-year mortgage.
B. The borrower would prefer the 15-year mortgage.
C. The borrower would be indifferent between the two mortgages.
D. The borrower is unable to compare mortgage loans of two different maturities.
Ans: C
Difficulty: Intermediate
Learning Objective: 4
[QUESTION]
10. Partially amortizing mortgage loans require periodic payments of principal, but are not
paid off completely over the loans term to maturity. Instead, the balance of the principal
amount is paid at maturity in what is commonly referred to as a:
A. balloon payment
B. early payment
C. up-front payment
D. payment cap
Ans: A
Difficulty: Basic
Learning Objective: 3
[QUESTION]
11. With the recent popularity of adjustable-rate mortgages (ARM), lenders have begun to
offer ARMs with different adjustment periods. Which of the following ARM choices will
most likely have the highest initial rate?
A. Three-year-one-year ARM
B. Five-year-one-year ARM
C. Seven-year-one-year ARM
D. Ten-year-one-year ARM
Ans: D

Difficulty: Intermediate
Learning Objective: 5
[QUESTION]
12. In considering a 3/1 adjustable-rate mortgage (ARM), the interest rate will be fixed for
how many years?
A. One year
B. Two years
C. Three years
D. Four years
Ans: C
Difficulty: Basic
Learning Objective: 5
[QUESTION]
13. One reason why adjustable-rate mortgages (ARMs) have become popular has to do with
the impact that they have on the interest rate risk that is borne by the parties involved. If
interest rates were to rise on a level-payment mortgage (LPM) the interest rate risk of the loan
would typically be borne by:
A. the borrower only
B. the lender only
C. both the borrower and lender
D. neither the borrower nor the lender
Ans: B
Difficulty: Basic
Learning Objective: 5
[QUESTION]
14. To encourage borrowers to accept adjustable rate mortgages (ARMs) rather than levelpayment mortgages, mortgage originators generally offer an initial short-term introductory
rate that is less than the prevailing market mortgage rate. This rate is referred to as a(n):
A. margin rate
B. teaser rate
C. index rate
D. discount rate
Ans: B
Difficulty: Basic
Learning Objective: 5
[QUESTION]
15. The APR can be a controversial measure of borrowing cost because it tends to:
A. overstate the true borrowing cost by assuming we hold mortgage until maturity

B. understate the true borrowing cost by assuming we hold mortgage until maturity

C. overstate the true borrowing cost by assuming we do not hold mortgage until maturity
D. understate the true borrowing cost by assuming we do not hold mortgage until maturity
Ans: B
Difficulty: Intermediate
Learning Objective: 2
Multiple Choice Problems
[QUESTION]
16. Given the following information on a fixed-rate fully amortizing loan, determine the
maximum amount that the lender will be willing to provide to the borrower. Loan Term: 30
years, Monthly Payment: $800, Interest Rate: 6%.
A. $6,707
B. $9,295.15
C. $13,333
D. $133,433
Ans: D
Difficulty: Basic
Learning Objective: 1
[QUESTION]
17. Given the following information on a 30-year fixed-payment fully-amortizing loan,
determine the remaining balance that the borrower has at the end of seven years. Interest Rate:
7%, Monthly Payment: $1,200.
A. $17,143
B. $79,509
C. $164,402
D. $180,369
Ans: C
Difficulty: Intermediate
Learning Objective: 1
[QUESTION]
18. Given the following information on an interest-only mortgage, calculate the monthly
mortgage payment. Loan amount: $56,000, Term: 15 years, Interest Rate: 7.5%.
A. $169.13
B. $350
C. $519.13
D. $4,200
Ans: B
Difficulty: Basic
Learning Objective: 1

[QUESTION]
19. Given the following information, calculate the balloon payment for a partially amortized
mortgage. Loan amount: $84,000, Term to maturity: 7 years, Amortization Term: 30 years,
Interest rate: 4.5%, Monthly Payment: $425.62.
A. $9,458
B. $30,620
C. $73,102
D. $84,000
Ans: C
Difficulty: Intermediate
Learning Objective: 1
[QUESTION]
20. Given the following information about a fully amortizing loan, calculate the lenders yield
(rounded to the nearest tenth of a percent). Loan amount: $166,950, Term: 30 years, Interest
rate: 8 %, Monthly Payment: $1,225.00, Discount points: 2.
A.7.7%
B. 8.0%
C. 8.2 %
D.10.0 %
Ans: C
Difficulty: Advanced
Learning Objective: 2
[QUESTION]
21. Given the following information, calculate the effective borrowing cost (rounded to the
nearest tenth of a percent). Loan amount: $166,950, Term: 30 years, Interest rate: 8 %,
Monthly Payment: $1,225.00, Discount points: 2, Other Closing Expenses: $3,611.
A. 7.7%
B. 8.2%
C. 8.5%
D. 9.1%
Ans: C
Difficulty: Advanced
Learning Objective: 2
[QUESTION]
22. Suppose a potential home buyer is interested in taking a $500,000 mortgage loan that has
a term of 30 years and a fixed mortgage rate of 5.25%. What is the monthly mortgage
payment that the homeowner would need to make if this loan is fully amortizing?
A. $552.50
B. $2,761.02

C. $17,820.72
D. $33,458.47
Ans: B
Difficulty: Basic
Learning Objective: 1
[QUESTION]
23. You have taken out a $350,000, 3/1 ARM. The initial rate of 6.0% (annual) is locked in
for 3 years. Calculate the outstanding balance on the loan after 3 years. The interest rate after
the initial lock period is 6.5%. (Note: the term on this 3/1 ARM is 30 years)
A. $2,098.43
B. $2,183.95
C. $336,294.25
D. $347,901.57
Ans: C
Difficulty: Intermediate
Learning Objective: 1
[QUESTION]
24. You have taken out a $300,000, 5/1 ARM. The initial rate of 5.4% (annual) is locked in
for 5 years. Calculate the payment after recasting the loan (i.e., after the reset) assuming the
interest rate after the initial lock period is 8.0%. (Note: the term on this 5/1 ARM is 30 years)
A. $1,684.59
B. $1,784.79
C. $1,887.75
D. $2,138.02
Ans: D
Difficulty: Intermediate
Learning Objective: 1
[QUESTION]
25. You have taken out a $225,000, 3/1 ARM. The initial rate of 5.8% (annual) is locked in
for 3 years and is expected to increase to 6.5% at the end of the lock period. Calculate the
initial payment on the loan. (Note: the term on this 3/1 ARM is 30 years)
A. $1,320.19
B. $1,422.15
C. $1,874.45
D. $1959.99
Ans: A
Difficulty: Basic
Learning Objective: 1
[QUESTION]

26. Given the following information, calculate the Effective Borrowing Cost (EBC). Loan
amount: $175,000, Term: 30 years, Interest rate: 7 %, Payment: $1,164.28, Discount points: 1,
Origination fee: $3,250. Assume the loan is held until the end of year 10.
A. 0.6%
B. 3.8%
C. 7.0%
D. 7.4%
Ans: D
Difficulty: Advanced
Learning Objective: 2
[QUESTION]
27. Suppose you have taken out a $200,000 fully-amortizing fixed rate mortgage loan that has
a term of 15 years and an interest rate of 4.25%. In month 2 of the mortgage, how much of the
monthly mortgage payment does the principal repayment portion consist of?
A. $705.51
B. $708.33
C. $796.22
D. $799.04
Ans: A
Difficulty: Intermediate
Learning Objective: 1
[QUESTION]
28. Suppose you have taken out a $125,000 fully-amortizing fixed rate mortgage loan that has
a term of 15 years and an interest rate of 6%. After your first mortgage payment, how much of
the original loan balance is remaining?
A. $1,054.82
B. $120,603.78
C. $124,570.18
D. $124,875.56
Ans: C
Difficulty: Intermediate
Learning Objective: 1
[QUESTION]
29. Assume you have taken out a partially amortizing loan for $325,000 that has a term of 7
years, but amortizes over 30 years. Calculate the balloon payment at maturity (Year 7) if the
interest rate on this loan is 4.5%.
A. $1,646.73
B. $118,468.21
C. $282,835.42
D. $324,572.02

Ans: C
Difficulty: Intermediate
Learning Objective: 1
[QUESTION]
30. Lets assume that you have just taken out a mortgage loan for $200,000 with an
origination fee of 2 points due upfront. The mortgage term is 30 years and the mortgage rate
is fixed at 4%. What is the cost of the origination fee in dollar terms?
A. $400.00
B. $954.83
C. $4000.00
D. $4954.83
Ans: C
Difficulty: Basic
Learning Objective: 2