Section 8 Unit 2

Question 1

Down Payment

Answer 1

Percentage of Price * Sales Price

Question 2

Sales Price

Answer 2

Down Payment / Percentage of Price

Question 3

Interest Only Payment

Answer 3

Loan Amount * Interest Rate

Question 4

Daily Simple Interest

Answer 4

Daily simple interest rate is the amount of interest that accrues every day on a simple interest loan, such as a mortgage.

Simple interest is calculated only on the principal owed

Question 5

Compound Interest

Answer 5

is calculated on the principal plus interest that haas already accumulated.
Borrowers pay interest on their interest.

Question 6

How is daily interest calculated

Answer 6

Divide interest rate by 365 (for the number of days in year)
Multiple that number by the outstanding mortgage balance

5% on $250000
Divide 0.05 /365 =0.00013699
Round to nearest send
250000 * 0.000013699=$34.25

Question 7

Calculating Taxes and Insurance Payments

Question 8

Monthly Insurance

Answer 8

$3000 /12 per month

Question 9

Monthly PMI

Answer 9

(Loan Amount * PMI Factor)/12
195000

Question 10

A borrower takes out a mortgage loan for $405,000 with a note rate of 4.75%. Property taxes are $2,200 per half year, and insurance is $950 each year. The borrower paid 10% down, so the PMI factor for the loan is 0.42%. What is the borrower’s total monthly payment?

Answer 10

Here are the steps we used to find out answer:

1. Interest-only payment per month = ($405,000 × 0.0475) ÷ 12 = $1,603.13
2. Monthly property tax amount = $2,200 ÷ 6 = $366.67
3. Monthly insurance payment amount = $950 ÷ 12 = $79.17
4. Monthly PMI charge = ($405,000 × 0.0042) ÷ 12 = $141.75

So, the total monthly payment would be:

$1,603.13 + $366.67 + $79.17 + $141.75 = $2,190.72

Question 11

ARM Cap Structures

Answer 11

Many (most, in fact) ARMs have cap structures, which dictate how high the interest rate may be after any adjustments. A cap structure has three numbers, which appear as A/B/C, where:
A = The first number is the maximum amount by which an interest rate may increase after the first adjustment
B = The second number is the maximum amount by which the interest rate may increase after all subsequent adjustments
C = The third number is the maximum interest rate that is allowed for the entire lifetime of the loan
For example, an ARM with a 2/3/7 cap structure indicates that the interest rate may not increase more than 2% after the first adjustment, by more than 3% on any subsequent adjustments, and may not exceed 7% at any time.

Question 12

Calculating Maximum Interest Rates

Answer 12

Assume that an ARM’s starting interest rate is 2.6% and the loan has a cap structure of 3/2/6. What is the maximum possible interest rate for the loan after its initial adjustment?

To find the maximum interest rate, we need the starting rate and the first number in the cap structure. From there, we simply plug in numbers and calculate our answer.

Maximum interest rate = 2.6% + 3% = 5.6%

Assuming that the loan will adjust annually after the initial adjustment until the loan is paid off, we could determine the maximum rate after the second adjustment to be:

Maximum interest rate = 5.6% (initial adjusted rate) + 2% (maximum amount the loan may increase for subsequent adjustments)

Maximum interest rate = 7.6%

However, the last number in the cap structure tells us that the maximum interest rate for the lifetime of the loan is 6%, so the maximum rate can’t exceed this cap.

Question 13

Calculating a Fully Indexed Rate

Answer 13

A fully indexed rate is defined as the total sum of the current index value and the margin.

Question 14

Fully Indexed Rate

Answer 14

Example time! A borrower has a five-year adjustable-rate mortgage with a start rate of 3.8% and a margin of 2.3%. The index used was at 2.5% at the time of the first rate adjustment.

To find the fully indexed rate, we use the formula:

Fully indexed rate = index value + margin

In this case, the margin is 2.3% and the index value at the first adjustment is 2.5%:

Fully indexed rate = 2.5% + 2.3% = 4.8%