REAE 3325- Exam 2 (CH 9) Questions and 100% Correct Solutions
REAE 3325- Exam 2 (CH 9) Questions and 100% Correct Solutions
REAE 3325- Exam 2 (CH 9) Questions and 100% Correct Solutions
Note - ANSWER-defines the exact terms and conditions of the load. Both the large size of real estate loan ...
REAE 3325- Exam 2 (CH 9) Questions
and 100% Correct Solutions
Note - ANSWER-defines the exact terms and conditions of the load. Both the large size
of real estate loan and the long maturity compel the not to be very explicit to prevent
misunderstandings between the borrower and the lender
Adjustable rate mortgage (ARM): - ANSWER-mortgage loans that use an adjustable
interest rates. These types of loans are common in commercial real estate and in many
home loans
Index rate - ANSWER-a market determined interest rate that is the "moving part" in the
adjustable interest rate.
Constant maturity - ANSWER-a common index for ARM home loans. The 1 year
constant maturity rate, for example, is the average of the market yield, found by survey,
on any outstanding US Treasury debt having exactly one year remaining to final
repayment, regardless of original maturity.
Cost of funds index - ANSWER-An index for adjustable rate mortgages based on the
weighted average of interest rates paid for deposits by thrift institutions (savings and
loan association and savings banks).
LIBOR - ANSWER-a common index of interest rates for income producing property, the
London Interbank Offering Rate is a short-term interest rate for loans among foreign
banks based in London.
Change date - ANSWER-date that interest rate changes each time period
Periodic caps - ANSWER-provisions in adjustable rate mortgages that limit change in
the contract interest rate from one change date to the next.
Overall caps - ANSWER-limit change over the life of the loan.
Payment cap - ANSWER-limit on payment changes rather than interest rate changes.
Negative amortization - ANSWER-occurs when the loan payment is not sufficient to
cover the interest cost and results in the unpaid interest being added to the original
balance, causing the loan amount to increase.
, Term for amortization - ANSWER-time period that determines the payment and the
schedule of interest and principal payments on a mortgage.
Term to maturity - ANSWER-term found in a balloon on the loan that determines when
the entire remaining balance on the loan must be paid in full.
Balloon loan - ANSWER-loan characterized by an amortization term that is longer than
the loan term. Because the loan balance will not be zero at the end of the loan term, a
balloon payment is necessary to pay off the remaining loan balance in full.
Right of prepayment - ANSWER-the right to retire a mortgage before maturity. The right
of prepayment will depend on the law of the state where the property is located and on
the particular mortgage contract.
Subprime loans - ANSWER-loans made to homeowners who do not qualify for standard
(prime) home loans. Subprime loans have high fees and costly prepayment penalties
that "lock in" the borrower to a high interest rate.
Prepayment penalty - ANSWER-charges, designed to discourage prepayment incurred
when a mortgage is repaid before maturity.
Yield maintenance prepayment penalty - ANSWER-a mortgage loan prepayment
penalty computed as the present value of the interest income to be last by the lender
due to early payment. The idea is to "make whole" the lender. Yield maintenance
penalties are found strictly in loans on income-producing properties.
Defeasance prepayment penalty - ANSWER-a clause that may be contained in
commercial mortgages to protect lenders from prepayments in a declining interest rate
environment. With defeasance, a borrower who prepays must purchase for the lender a
set of US Treasury securities whose coupon payments exactly replicate the cash flows
the lender will lose as a result of the prepayment of the mortgage.
Late fee - ANSWER-fees assessed for standard home loans when payments are
received after the 15th of the month the payment is due. Also found in commercial
mortgages.
Personal liability - ANSWER-liability assumed by borrowers that allows lenders to sue
them personally for fulfillment of the contract.
Default - ANSWER-the consequence of prolonged delinquency: the failure of a borrower
to meet the terms and conditions of a note.
Recourse loans - ANSWER-loans in which the borrower has personal liability and the
lender has legal recourse against the borrower in case of default.
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