Mortgage Financing Concepts

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Questions and Answers

What happens when a mortgage note with a contract rate of 12 percent is sold to yield a 10 percent return?

It was sold at par.

It was sold at a discount. (correct)

It was sold at a premium.

There is insufficient information to determine the sale condition.

How do discount points affect effective interest rates?

They decrease the effective interest rate.

They have no effect on effective interest rates.

They may vary the effective interest rates depending on tax deductibility. (correct)

They increase effective interest rates.

What is a consequence of paying discount points if a loan is paid off early?

It has no impact on effective interest.

Its effect depends on timing in the amortization period.

It increases the effective interest rate. (correct)

It decreases the effective interest rate.

A mortgage note sold at a higher yield than the contract rate indicates it was sold:

At a discount. Signup and view all the answers

What is true about the effect of discount points on a mortgage?

They can either increase or decrease the effective interest rate. Signup and view all the answers

Which option describes the sale of a mortgage note at a yield lower than the contract interest rate?

Sold at a discount. Signup and view all the answers

What may affect the effective interest rate when discount points are involved?

Tax deductibility of the discount points. Signup and view all the answers

If a borrower pays discount points and then repays the loan early, the outcome will likely be:

An elevated effective interest rate. Signup and view all the answers

What is the annual debt service constant on a monthly mortgage payment?

Exactly twelve times the amount of the monthly constant. Signup and view all the answers

What defines the contract interest rate?

It is the nominal rate. Signup and view all the answers

Which factors influence the size of the annual debt service?

All of the above. Signup and view all the answers

If the nominal interest rate is 7% and domestic inflation is 4%, what is the real interest rate?

3% Signup and view all the answers

What is the effective annual rate when a bank pays a stated annual interest rate of 12% with monthly compounding?

12.68% Signup and view all the answers

What is true about the relationship between nominal and real interest rates?

Nominal interest rate can be higher due to inflation rates. Signup and view all the answers

What happens to the real interest rate if inflation decreases?

It increases. Signup and view all the answers

Study Notes

Mortgage Note Sales

A mortgage note sold after two years at a yield of 10%, with a contract rate of 12%, was sold at a discount.

Effective Interest Rates

Effective interest rates increase when discount points are charged.

Prepayment Impact

Early loan repayment (no prepayment penalty) increases the effective interest rate.

Early Note Payment

If a note is paid off before maturity, the investor's yield decreases.

Debt Service Constants

The annual debt service constant is slightly less than twelve times the monthly constant for a fully amortizing mortgage.

Contract Interest Rate

The contract rate is the nominal rate stipulated in the promissory note.

Real Interest Rate

The real interest rate decreases when inflation increases during the loan period.

Annual Debt Service Factors

Annual debt service depends on loan amount, interest rate, and amortization period.

Nominal vs. Real Interest Rate

If the nominal rate is 7% and inflation is 4%, the real rate is 3%.

Effective Annual Interest Rate

A stated annual interest rate of 12% with monthly compounding results in an effective annual rate of approximately 12.68%.

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Description

Explore the key concepts of mortgage financing, including yield, effective interest rates, prepayment impact, and debt service constants. This quiz covers important factors that influence mortgage notes, allowing you to test your knowledge in this crucial area of real estate finance.