Question 1

Joe is shopping for a new home. He is trying to decide how large his down payment should be. Joe is earning 2.5 percent APY in his savings account, whereas his mortgage loan will cost him 5 percent APR. If Joe has the money available in his savings account, he should

Accepted Answer

Joe should increase his down payment because the interest rate on his mortgage (5% APR) is higher than the interest he earns on his savings (2.5% APY). By increasing the down payment, he reduces the loan amount and the total interest paid over time.

Question 2

Closing costs on the purchase of a house

Accepted Answer

Closing costs are additional expenses incurred during the purchase of a house, which reduce the amount of cash available for the down payment as they need to be paid upfront by the buyer.

Question 3

Mortgage payments (including principal and interest) depend upon the interest rate,

Accepted Answer

Mortgage payments are primarily determined by the interest rate, the loan amount, and the length of the mortgage. The down payment affects the loan amount but is not directly part of the mortgage payment calculation.

Question 4

Mary Anne is considering buying a home. She is currently renting and does not have to pay for some utilities, landscaping, taxes, repairs, or maintenance. While she is excited about living in her own home, she is worried about being responsible for many more aspects of ownership. In order to determine the true cost of ownership of a home, Mary Anne should consider

Accepted Answer

Mary Anne should consider all aspects including the initial purchase price, future appreciation or depreciation, the cost of financing, and repairs and maintenance costs to determine the true cost of home ownership.

Question 5

The Jones have $72,000 in savings available for up-front costs on a home purchase. They qualified for a 30-year mortgage at 5.5% APR. They also expect closing costs to total $3,000. They have budgeted $2,500 per month to allocate to housing costs, including monthly nonfinancing costs of $150 for homeowner's insurance, $585 for property taxes, $130 for repairs, and $60 for maintenance. What is the maximum they can afford to pay for a home?

Accepted Answer

The Jones have $72,000 for a down payment and closing costs, leaving $69,000 for the down payment after $3,000 in closing costs. Their monthly budget for the mortgage payment is $2,500 minus $925 for non-financing costs, leaving $1,575 for the mortgage. Using a 5.5% APR for a 30-year mortgage, the maximum loan amount they can afford is approximately $277,392. Adding the $69,000 down payment, the maximum home price they can afford is $346,392.

Question 6

Most lenders require that a borrower's mortgage debt service ratio be no more than 28 percent of their

Accepted Answer

Mortgage debt service ratio is a measure of how much of a borrower's income is used to pay for their mortgage. Lenders typically require that this ratio be no more than 28% of the borrower's income.

Question 7

The tax advantages of home ownership include all of the following except

Accepted Answer

Maintenance costs are not tax-deductible for homeowners, whereas mortgage interest, property taxes, and certain capital gains from the sale of a primary residence can have tax advantages.

Question 8

The Sayeds bought a home in January and borrowed $400,000 to finance it. The mortgage interest and principal payment is $2,147 per month. In the first year, they paid $19,799 in interest, $5,965 in principal, and $10,100 in property taxes. They are in the 24% marginal tax bracket. Approximately, how much will they save in federal income taxes from home ownership the first year, if itemizing deductions? (Round to the nearest whole dollar.)

Accepted Answer

The answer of The Sayeds bought a home in January...

Question 9

The two ratios most commonly used by mortgage lenders to evaluate the ability to pay a mortgage loan are the

Accepted Answer

Mortgage lenders typically use the mortgage debt service ratio (also known as the front-end ratio) and the total debt service ratio (also known as the back-end ratio) to assess a borrower's ability to pay a mortgage loan.

Question 10

Tim's monthly gross income is $2,900. He is buying a house that requires a $660 monthly payment. Property taxes would be $120 per month and insurance premiums of $45 per month. What is Tim's mortgage debt service ratio?

Accepted Answer

Mortgage debt service ratio = (Monthly housing payment + Property taxes + Insurance premiums) / Monthly gross income= ($660 + $120 + $45) / $2,900= $825 / $2,900= 0.2845= 28.45%

Question 11

Sam's mortgage payment is $750 per month. He also has other monthly debt payments of $440. If his monthly after-tax income is $3,950, what is Sam's debt payment ratio?

Accepted Answer

Sam's total monthly debt payments are $750 + $440 = $1,190. His debt payment ratio is calculated by dividing his total debt payments by his monthly after-tax income: $1,190 / $3,950 = 0.3013, or 30.13%.

Question 12

Which of the following is a mortgage loan that has a fixed rate, a fixed term, and fixed payments?

Accepted Answer

A conventional mortgage typically has a fixed interest rate, a fixed term, and fixed monthly payments.

Question 13

Which of the following statements is true of adjustable rate mortgages?

Accepted Answer

Adjustable rate mortgages (ARMs) have interest rates that can change over time, but these changes are typically subject to caps or limits to protect borrowers from drastic increases.

Question 14

Which type of mortgage allows homeowners to stay in their homes but receive a stream of cash flow from their homes?

Accepted Answer

A reverse annuity mortgage allows homeowners, typically seniors, to convert part of the equity in their homes into cash while still living in the home.

Question 15

A mortgage is a

Accepted Answer

A mortgage is a long-term loan specifically secured by real property, such as a house or land, and is typically amortized over a set period.

Question 16

If a financial institution makes a home loan and then sells the loan to another financial institution, this is a type of

Accepted Answer

This is a secondary mortgage market transaction, where existing loans are sold to other financial institutions.

Question 17

Under a (n) ____________ mortgage, the loan balance is paid off more quickly than under a conventional mortgage.

Accepted Answer

A growing equity mortgage is designed to pay off the loan balance more quickly by increasing the monthly payments over time, which reduces the principal balance faster than a conventional mortgage.

Question 18

In a home purchase, what are discount points?

Accepted Answer

Discount points are fees paid directly to the lender at closing in exchange for a reduced interest rate on the mortgage.

Question 19

One discount point is equal to ___ percent of the loan amount.

Accepted Answer

One discount point is equal to 1 percent of the loan amount.

Question 20

Refinancing a home incurs ________ mortgage-related finance charges than a mortgage on a new home purchase.

Accepted Answer

Refinancing a home typically involves similar mortgage-related finance charges as a new home purchase, such as application fees, appraisal fees, and closing costs.

Quiz 6: Making Automobile and Housing Decisions