FIN 3710



FIN/RES9776 Department of Real Estate

Real Estate Finance Baruch College

Spring 2011

|FIN / RES 9776 |

|Midterm Exam 03/22/2011 |

SESSION: 7:35 – 8:50 PM ________

1. The exam is closed book and closed notes. You can bring in one page, single-sided, 8(11 formula sheet.

2. You can (and probably have to) use a calculator.

3. You have a total of 60 minutes for the exam.

4. The whole exam has a total of 20 points. It will count 20% for your final course grade. There are total of 8 multiple choices questions and three short essay questions. In additional one extra credit question.

5. Do not separate the exam book. Turn in the entire exam at the end.

6. Budgeting your time efficiently.

7. Good luck.

Q1-Q8: 1 point each

1 One of the first amortizing mortgages was the constant amortization mortgage. Which of the following characterized the components of the CAM payment over the life of the loan?

| |Interest |Amortization |Payment |

|A. |Decreasing |Decreasing |Decreasing |

|B. |Constant |Decreasing |Decreasing |

|C. |Decreasing |Constant |Decreasing |

|D. |Constant |Constant |Constant |

2 Over the life of the loan, which of the following loans would continually have a lower loan balance given each loan had the same term, principal amount, and interest rate relative to the other two loans (except for the beginning balance and the ending balance)?

A. CAM

B. CPM

C. Interest-only Mortgage

D. They are all the same

3. Which one of the following is TRUE about fixed rate mortgage (including IO, CAM, CPM, and GPM) in general:

A. The interest payment is always constant

B. The interest payment always goes down over time

C. The interest payment is always the interest rate times the balance from the last period

D. The interest payment is always larger than the principal payment

Q4 – Q6 use the following information:

You bought a $500,000 house 10 years ago using a 30 year mortgage that has

i. 20% down payment and

ii. 12% annual interest rate.

iii. The loan is interest only for the first 10 years.

iv. The loan fully amortizes over its life in the last 20 years just like a constant payment mortgage.

You have been sending in monthly payment according to the schedule every month.

4. How much interests have you paid over the first 10 years?

|a. | < $250,000 |

|b. |$250,000 - $375,000 |

|c. |$375,000 - $500,000 |

|d. | > $500,000 |

5. What is the mortgage balance by the end of the 5th year after origination?

|a. | < $250000 |

|b. |$250,000 - $375,000 |

|c. |$375,000 - $500,000 |

|d. | > $500,000 |

6. What is the mortgage balance by the end of the 15th year after origination?

|a. | < $250000 |

|b. |$250,000 - $375,000 |

|c. |$375,000 - $500,000 |

|d. | > $500,000 |

Q7 – Q8 use the following information:

You bought a $400,000 house 10 years ago using a 30 year fixed rate mortgage with

a. 10% down payment and

b. 12% annual interest rate.

c. The loan has a constant amortization requirement (CAM).

d. The loan fully amortizes over its life.

You have been sending in monthly payment according to the schedule every month.

7. How much principal have you paid over the first 10 years?

|a. | < $ 50,000 |

|b. |$ 50,000 - $100,000 |

|c. |$100,000 - $150,000 |

|d. | > $150,000 |

8. What is the proportion of next (121th) payment that will go to principal payment?

|a. | < 25% |

|b. |25% - 30% |

|c. |30% - 35% |

|d. | > 35% |

|Question |Answer |Question |Answer |Question |Score |

|1 | |5 | |9 | |

|2 | |6 | |10 | |

|3 | |7 | |11 | |

|4 | |8 | |Exam Total |

|Q1-8 Total | | |

Q9. You bought a $500,000 house 10 years ago using a 30 year fixed rate mortgage with

i. 20% down payment and

ii. 6% interest rate.

iii. The mortgage requires constant total payment

iv. The loan fully amortizes over its life.

You have been paying the amount according to the schedule every month.

You want to figure out mortgage interest deduction for tax purpose. What is the total mortgage interest payment you made in the past year (the 10th year in the life of the mortgage) (3 points)?

Hint: the 10th year starts from month 109 and ends in month 120.

Q10. A reverse mortgage is issued for a house that is valued at $600,000 today at 6% annual interest rate.

i. The borrower will receive an initial lump sum payment of $50,000

ii. In addition, the borrower will receive $3,500 each month for the next 10 years.

a. What is the mortgage balance in 10 years (2 points)?

b. What do you expect the borrower to do in 10 years if between now and 10 years later, the house price (2 points)

i. drops by 20%

ii. increases by 20%?

Q11. A graduate payment mortgage (GPM) is issued at 12% fixed rate for 25 years term. The payment is scheduled to increase by 25% at the end of the 3rd year AND 6th year, and then stays flat thereafter. If the initial balance borrowed is $500,000

a. What is the first month payment for the mortgage (3 pts)?

b. what is the mortgage balance by the end of the 3rd year and 6th year (2 pts)?

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