RE FINANCE: CH.4 ADJUSTABLE RATE AND OTHER ALTERNATIVE MORTGAGE INSTRUMENTS

1. What are the key characteristics of ARM loans?
2. What is the main lender risk in granting loans amortized in 30 years, but due in 7 years?
3. List the main elements of a RAM loan.
1. The principal objective of an Adjustable Rate Mortgage (ARM) loan is toa. reduce the risk of foreclosure.b. limit mortgage choices duringperiods of tight money.c. establish predictable cash flowduring erratic real estate markets.d. share the risks of rising interest rates between lender and borrower. d. share the risks of rising interest rates between lender and borrower.
2. Under an ARM loan, the distance between the actual rate paid by the borrower and the index is called thea. adjustment. b. cap.c. term.d. margin. d. margin.
3. The maximum interest rate that a lender can charge under an ARM is called thea. cap.b. margin.c. term.d. adjustment. a. cap.
In an ARM loan, when the initial interest rate is abnormally low it isknown as the_____rate. a. indexb. teaserc. cappedd. basement b. teaser
5. Reverse annuity mortgages are growing more popular with an aging population. Those who qualifya. must be over age 59.b. usually have very little equity in their homes.c. can borrow either in lump sum or in monthly payments.d. must remain in their home until sold. c. can borrow either in lump
6. The first month’s interest on a $200,000 loan at 9 percent payable at $1,800 per month is:a. $1,800b. $1,600c. $1,500d. $1,300 c. $1,500
7. The first month’s negative amorti- zation (shortfall) amount on a $200,000 loan at 9 percent payable at $1,300 per month is:a. $600 b. $500 c. $300 d. $200 d. $200
8. The reverse annuity mortgage (RAM) is especially designed fora. poor families.b. younger borrowers.c. older borrowers.d. those unable to meet balloon payments. c. older borrowers.
9. The loan plan that offers borrowers an adjustable interest rate with the right to switch to a fixed rate at a later date is thea. dual rate, variable rate mortgage. b. rollover mortgage.c. reverse annuity mortgage.d. pledged account mortgage. b. rollover mortgage.
10. Under a convertible loan, the time period when the borrower is al- lowed to switch from an ARM to fixed rate or vice versa is called the______period.a. shiftb. crossoverc. section d. window d. window
11. An advantage of a 15-year mortgage over a 30-year loan is thata. borrowers can qualify with a smaller down payment.b. monthly payments are always lower than in the traditional 30-year loan.c. borrowers can usually secure a lower interest rate.d. borrowers build up equity faster, even with a much higher interest rate. c. borrowers can usually secure a lower interest rate.
12. If a borrower is unable to meet a balloon payment, the borrower might arrange toa. obtain an extension of the loanwith the existing lender.b. refinance the property.c. sell the property.d. all of the above. d. all of the above.
13. One option under a RAM program, where the borrower is scheduled to receive monthly payments for a fixed number of years, is calleda. tenure option.b. set option.c. term option.d. line of credit option. c. term option.
14. Which of the following will trigger a demand for payoff for a borrower under a RAM loan?a. moving to a second home for six monthsb. staying in a rest home for morethan one yearc. taking in a roommated. receiving a cash inheritance of more than $250,000 b. staying in a rest home for more
15. Adjustable rate mortgagesa. represent alternatives to standardfixed rate, fully amortized mortgages.b. are available only for owner- occupied dwellings.c. are the preferred choice by most borrowers.d. transfer some of the risk of rising inflation from borrower to lender. a. represent alternatives to standardfixed rate, fully amortized mortgages.
16. The reason why a home buyer may opt for an adjustable rate mortgage over a fixed rate mortgage contain- ing a “teaser rate” is toa. reduce initial monthly payments.b. avoid late charges commonlyassociated with fixed rate loans.c. avoid negative amortization.d. avoid prepayment penalties. a. reduce initial monthly payments.
17. A 15-year loan, as opposed to a30-year loan, willa. have no impact on annual inter- est deductions for income tax purposes.b. result in slower equity buildup. c. create a faster equity in theproperty, all other things beingequal.d. initially generate lower monthly payments. c. create a faster equity in theproperty, all other things beingequal.
18. A biweekly payment program requires the borrower to make____payments per year. a. 12b. 13 c. 24 d. 26 d. 26
19. When compared with a 30-year loan, the 15-year loan is especially attractive for borrowers who desire to reduce theira. monthly installment.b. total interest payments.c. principal payments.d. mortgage insurance premiums. b. total interest payments.
20. ARM loans pose difficulties for prospective borrowers to under- stand due to each of the following, excepta. its simplicity compared to fixed rate instruments.b. the relationship of an index to U.S. Treasury securities.c. the relationship of the index to the so-called margin.d. how interest rates are adjusted to reflect a particular index. a. its simplicity compared to fixed rate instruments.
Adjustable rate mortgage(ARM) A loan pegged to an index; as the index goes up or down, the borrower’s interest rate follows ac- cording to contractual limits, spelled out in the note and trust deed.
Balloon payment One installment payment on an amortized note that is at least double the amount of a regular installment. This is fre- quently a final payment on the due date.
Biweekly loan payment Real estate loan payments made every two weeks. A monthly payment is divided by two and paid 26 times per year.
Cap Upper limit on adjustable or variable interest rate loans on a periodic basis during life of loan.
Fixed rate loan Loans with constant fixed rates that will not change over the life of the loan.
Negative amortization Loans in which the required payment relative to the interest rate charged is insufficient to pay all of the interest due each month, resulting in negative amortization.
Reverse annuity mortgage (RAM) Stream of monthly payments provided to senior homeowners through an annuity purchased by a loan against the owners’ accumulated equity in their home.

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