3 Solved Problems on Adjustable Rate Mortgages - Quiz | RE 611, Quizzes of Real Estate Management

Download 3 Solved Problems on Adjustable Rate Mortgages - Quiz | RE 611 and more Quizzes Real Estate Management in PDF only on Docsity! RE 611 / Fin 611 – Real Estate Finance Adjustable-rate Mortgages Sample Quiz Questions – Solutions Dr. Stanley D. Longhofer ______ 1. One year ago, Sean took out a 1-year ARM amortized over 30 years and indexed to the COFI with a 2 percent margin and a 7.5 percent PAYMENT cap. The interest rate this mortgage is now due to change. His current interest rate is 2.75 percent, his monthly payment is $469.48, and his outstanding balance is $112,497.38. The COFI currently stands at 3.25 percent. What is the new payment on Sean’s mortgage? A. $630.10 B. $469.48 C. $596.04 D. $504.69 E. None of the above; the correct answer is __________. ______ 2. One year ago Zoot took out a $210,000, 1-year ARM amortized over 30 years with monthly payments. This ARM is indexed to the 1-year Treasury security with a 3 percent margin and a 4 percent PAYMENT cap. The initial interest rate on this mortgage was 4.25 percent, and the initial payment was $1,033.07. At the first adjustment date, the 1-year Treasury security is yielding 3.25 percent and the balance outstanding on the mortgage is $206,459.68. What will be the new payment on this mortgage during the second year? A. $1,286.28 B. $1,074.39 C. $1,271.21 D. $1,033.07 E. $1,422.18 ______ 3. Price-level adjusted mortgages (PLAMs) are characterized by A. a constant amount paid to principal each month. B. payments that are relatively low early in the loan and “step up” in later years. C. constant monthly payments during the entire life of the loan. D. ADJUSTMENTS TO THE PRINCIPAL BALANCE EACH YEAR TO ACCOUNT FOR INFLATION THAT HAS BEEN REALIZED. E. None of the above. ______ 4. TRUE or False: ARMs tied to stable indexes generally have higher expected yields for the lender than do ARMs tied to more volatile indexes. ______ 5. TRUE or False: A teaser rate is an initial interest rate on an adjustable-rate mortgage that is below the fully-indexed rate at the time the mortgage is originated. ______ 6. TRUE or False: All else equal, a 6-month ARM should have a lower effective borrowing cost than a 1-year ARM. 1) (6 points) Consider a $225,000, 1-year ARM indexed to the 11th-District Cost of Funds Index (COFI), with an initial interest rate of 4.50 percent, a 2 percent margin, and 1-3 caps (one percent annually and three percent lifetime). This ARM is amortized over 15 years with monthly payments. a) (1 point) What is the initial monthly payment on this ARM? N = 180, I = 4.50, PV = 225,000, FV = 0  PMT =  $1,721.23 b) (5 points) If at the end of the first year the COFI is at 3.75 percent, what is the payment on this mortgage during the second year? First, calculate the balance outstanding at the end of the first year: N = 12  FV =  $214,250.27. Based on the lifetime cap, the highest rate this loan can ever have is 4.50 + 3.00 = 7.50%. Based on the annual cap, the highest rate this loan can have in the second year is 4.50 + 1.00 = 5.50%. The fully-indexed rate during the second year is 3.75 + 2.00 = 5.75%. This is greater than the limit imposed by the annual cap, so the new contract rate will be 5.50%. Finally, calculate the new payment on the mortgage: N = 180  12 = 168, I = 5.50, PV = 214,250.27, FV = 0  PMT =  $1,831.47. 2) (8 points) Consider a 1-year ARM, indexed to the 1-year Treasury security with a 2.00 percent margin and 1/4 caps (1 percent per year and 4 percent lifetime). These caps also act as floors. The initial interest rate on this mortgage is 5.25 percent. Based on this information, fill in the blanks in the following table: Year Index Value Fully-indexed Rate Contract Rate 1 N/A N/A 5.25% 2 5.50 7.50% 6.25% 3 5.00 7.00% 7.00% 4 3.50 5.50% 6.00% 5 3.25 5.25% 5.25% 2