**1i.**On an adjustable rate mortgage, do borrowers always prefer smaller (i.e., tighter) rate caps that limit the amount the contract interest rate can increase in any given year or over the life of the loan? Explain why or why not.

**1ii.** Private mortgage insurance (PMI) is usually required on _____ loans with loan-to-value ratios greater than_____ percent.

**a.**Home, 80 percent.

**b.**Home, 60 percent.

**c.**Income property, 75 percent.

**d.**Income property, 80 percent.

**2i.**Explain the potential tax advantage associated with home equity loans

**2ii.**The dominant loan type originated and kept by most depository institutions is the:

**a.**Fixed-payment fully amortized mortgage.

**b.**Adjustable rate mortgage.

**c.**Purchase-money mortgage.

**d.**FHA-insured mortgage.

**3i.**Distinguish between conforming and nonconforming residential mortgage loans and explain the importance of the difference.

**3ii.**Which of the following mortgage types has the most default risk, assuming the initial loan-to-value ratio, contract interest rate, and all other loan terms are identical?

**a.**Interest-only loans.

**b.**Fully amortizing loans.

**c.**Partially amortized loans.

**d.**There is no difference in the default risk of these loans.

**4i.**Discuss the role and importance of private mortgage insurance in the residential mortgage market.

**4ii.** A mortgage that is intended to enable older households to “liquify” the equity in their home is the:

**a.**Graduated payment mortgage (GPM).

**b. **Adjustable rate mortgage (ARM).

**c.**Purchase-money mortgage (PMM).

**d.**Reverse annuity mortgage (RAM).

**5i.** Explain the maturity imbalance problem faced by savings and loan associations that hold fixed-payment home mortgages as assets.

**5ii.** A jumbo loan is:

**a.**A conventional loan that is large enough to be purchased by Fannie Mae or Freddie Mac.

**b.**A conventional loan that is too large to be purchased by Fannie Mae or Freddie Mac.

**c.**A multi-property loan.

**d.**A VA loan that exceeds the normal limits.

**6i.**Suppose a homeowner has an existing mortgage loan with these terms: Remaining balance of $50,000, interest rate of 8 percent, and remaining term of 10 years (monthly payments). This loan can be replaced by a loan at an interest rate of 6 percent, at a cost of 8 percent of the outstanding loan amount. Should the homeowner refinance? What difference would it make if the homeowner expects to be in the home for only five more years?

**6ii.**The maximum loan-to-value ratio for an FHA loan over $50,000 is approximately:

**a.**90 percent.

**b.**97 percent.

**c.**99 percent.

**d.**100 percent.

**7i.** *Assume an elderly couple owns a $140,000 home that is free and clear of mortgage debt. A reverse annuity mortgage (RAM) lender has agreed to a $100,000 RAM. The loan term is 12 years, the contract interest rate is 9.25 percent, and payments will be made at the end of each month.

**a.**What is the monthly payment on this RAM?

**b.**Fill in the following partial loan amortization table:

Month | Beginning Balance | Monthly Payment | Interest | Ending balance |

1 | – | – | – | – |

2 | – | – | – | – |

3 | – | – | – | – |

4 | – | – | – | – |

5- | – | – | – | – |

*Optional question, using concepts from Chapter 15

**c.**What will be the loan balance at the end of the 12-year term?

**d.**What portion of the loan balance at the end of year 12 represents principal? What portion represents interest?

**7ii.**The maximum loan-to-value ratio on a VA-guaranteed loan is:

**a.**90 percent.

**b.**98 percent.

**c.**99 percent.

**d.**100 percent.

**8i.** *Five years ago you borrowed $100,000 to finance the purchase of a $120,000 home. The interest rate on the old mortgage loan is 10 percent. Payments are being made monthly to amortize the loan over 30 years. You have found another lender who will refinance the current outstanding loan balance at 8 percent with monthly payments for 30 years. The new lender will charge two discount points on the loan.

Other refinancing costs will equal $3,000.There are no prepayment penalties associated with either loan. You feel the appropriate opportunity cost to apply to this refinancing decision is 8 percent.

**a.**What is the payment on the old loan?

**b.**What is the current loan balance on the old loan (five years after origination)?

**c.**What would be the monthly payment on the new loan?

**d.**Should you refinance today if the new loan is expected to be outstanding for five years?

**8ii.** Conforming conventional loans are loans that:

**a.**Are eligible for FHA insurance.

**b.**Are eligible for VA guarantee.

**c.**Are eligible for purchase by Fannie Mae and Freddie Mac.

**d.**Meet federal Truth-in-Lending standards.

**9.**Home equity loans typically:

**a.**Are fixed-rate, fixed-term loans.

**b.**Are first mortgage loans.

**c.**Are originated by mortgage bankers.

**d.**Have tax-deductible interest charges.

**10.**A simple but durable method of determining whether to refinance is to use:

**a.**Net benefit analysis.

**b.**Cost of borrowing.

**d.**An interest rate spread rule.

**e.**A payback rule.

**11.**Probably the greatest contribution of FHA to home mortgage lending was to:

**a.**Establish the use of the level-payment home mortgage.

**b.**Create mortgage insurance for conventional loans.

**c.**Create the adjustable rate mortgage.

**d.**Create the home equity loan.

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