chapter 15: mortgage calculations and decisions

Question 1

monthly loan constant

Answer 1

monthly mortgage payment divided by the loan amount

Question 2

find the monthly payment

Answer 2

don’t forget to divide I by 12 and multiply n by 12

Question 3

loan balance

Answer 3

the outstanding principal balance on a loan. will always be equal to the original balance if the loan is an interest only loan. declines over time if the loan is self-amortizing

Question 4

discount points

Answer 4

advance interest

-upfront financing costs charged by lenders to increase the yield on a loan

Question 5

lenders yield

Answer 5

the implied discount rate or internal rate of return, on a loan - given all of the cash inflows and outflows on the loan to the lender

Question 6

effective borrowing cost (EBC)

Answer 6

the true borrowing cost including all the effect of all up-front financing costs. is similar to APR but allows for the effect of early payoff

Question 7

closing costs

Answer 7

sometimes called settlement costs, costs in addition to the price of a property, usually including mortgage origination fee, title insurance, attorney’s fee, and prepayable items such as taxes and insurance payments collected in advance at closing and held in an escrow account until needed

Question 8

annual percentage rate (APR)

Answer 8

an approximation of the mortgage loan’s annual effective borrowing cost in the absence of early payoff. this measure includes the effect of up-front financing costs on the true cost of borrowing

Question 9

usually how much is a loan origination fee

Answer 9

1% of the loan

Question 10

level payment mortgages (LPMs)

Answer 10

a fully amortizing loan with equal periodic payments

Question 11

interest only (straight-term) mortgages

Answer 11

a mortgage loan that is interest only for some years, perhaps 10 or 15, after which payment increases to an amount sufficient to fully amortize the loan in the remaining terms

Question 12

partially amortizing mortgages

Answer 12

require periodic payments of principal, as well as interest, but are not paid off completely over the loan’s term to maturity
-the loan has an amortization term longer than the term to maturity.

Question 13

early payment mortgage (EPM)

Answer 13

loans where the borrower makes additional payments to reduce outstanding principal more quickly than scheduled
-may not always be financially wise

Question 14

adjustable rate mortgage (ARM)

Answer 14

alternative mortgage form where the interest rate is tied to an indexed rate over the life of the loan, allowing interest rate risk to be shared by borrowers and lenders

Question 15

adjustment periods

Answer 15

the number of initial years in which an ARM remains fixed before the interest rate is allowed to be adjusted