BUS 410 QUIZ || 100% Accurate Answers.
Mortgages correct answers loans to individuals or businesses to purchase homes, land, or other
real property
• Four basic types of mortgages are issued by U.S. financial institutions correct answers 1) home
mortgages are used to purchase one- to four-family dwellings (called "single-family mortgages")
- 75%
2) multifamily dwellings mortgages are used to purchase apartment complexes, townhouses, and
condominiums - 17%
3) commercial mortgages are used to finance the purchase of real estate for business purposes -
7%
4) farm mortgages are used to finance the purchase of farms
The key difference between US and Canada correct answers interest on mortgages is tax
deductible in the US. - Interest on up to $750,000 of mortgage debt is deductible.
Mortgage Refinancing (Prepayment) correct answers • Mortgage Prepayment happens when a
borrower takes out a new mortgage and uses the proceeds to pay off an existing mortgage
- mortgages are most often refinanced when an existing mortgage has a higher interest rate than
current rates
- In Canada, mortgages can be open or closed. Open mortgages allow prepayments without
penalties. Closed mortgages charge steep prepayment penalties, e.g., an interest rate differential
between your mortgage rate and the current market rate multiplied by the outstanding balance
and remaining months to maturity. If you buy a new house you can port your mortgage to the
new house, avoid the prepayment penalty.
Mortgage types: Interest rates correct answers • Fixed-rate mortgages
• Adjustable-rate mortgages
Fixed-rate mortgages correct answers lock in the borrower's interest rate
, - required monthly payments are fixed over the life of the mortgage.
- lenders assume interest rate risk
Adjustable-rate mortgages correct answers (ARMs) tie the borrower's interest rate to some
market interest rate or index
- required monthly payments can change over the life of the mortgage, although they may
initially be fixed for a set time period.
• For example, hybrid ARMs: 5/1 (fixed rate for 5 years, then rate reset every year) are popular
in the US.
- borrowers assume interest rate risk with an ARM
- ARMs can increase default risk
• Canada. All mortgages in Canada are ARMs from the US perspective. - Fixed rate mortgages:
the rate resets only at the end of the term (every 3-10 years, 5yrs most typical). - Variable rate
mortgages: the rate changes any time the prime rate changes
Mortgage types correct answers • Subprime mortgages
- Subprime mortgages are mortgages whose borrowers do not qualify for a 'prime' credit rating
because of their low FICO credit scores (arising from prior credit problems, such as
delinquencies and defaults; or they may simply lack sufficient credit history or have insufficient
income).
- Beginning in 2006, problems in the subprime mortgage market led to the financial crisis of
2007 and 2008
• Second mortgage: home equity loan vs. home equity line of credit (HELOC)
- Are similar in that they are loans secured by the property value.
- Second mortgage is a subordinated claim to the first mortgage
- Home equity loan is lump sum vs. HELOC is a line of credit
• Reverse-annuity mortgages (RAMs)
Mortgages correct answers loans to individuals or businesses to purchase homes, land, or other
real property
• Four basic types of mortgages are issued by U.S. financial institutions correct answers 1) home
mortgages are used to purchase one- to four-family dwellings (called "single-family mortgages")
- 75%
2) multifamily dwellings mortgages are used to purchase apartment complexes, townhouses, and
condominiums - 17%
3) commercial mortgages are used to finance the purchase of real estate for business purposes -
7%
4) farm mortgages are used to finance the purchase of farms
The key difference between US and Canada correct answers interest on mortgages is tax
deductible in the US. - Interest on up to $750,000 of mortgage debt is deductible.
Mortgage Refinancing (Prepayment) correct answers • Mortgage Prepayment happens when a
borrower takes out a new mortgage and uses the proceeds to pay off an existing mortgage
- mortgages are most often refinanced when an existing mortgage has a higher interest rate than
current rates
- In Canada, mortgages can be open or closed. Open mortgages allow prepayments without
penalties. Closed mortgages charge steep prepayment penalties, e.g., an interest rate differential
between your mortgage rate and the current market rate multiplied by the outstanding balance
and remaining months to maturity. If you buy a new house you can port your mortgage to the
new house, avoid the prepayment penalty.
Mortgage types: Interest rates correct answers • Fixed-rate mortgages
• Adjustable-rate mortgages
Fixed-rate mortgages correct answers lock in the borrower's interest rate
, - required monthly payments are fixed over the life of the mortgage.
- lenders assume interest rate risk
Adjustable-rate mortgages correct answers (ARMs) tie the borrower's interest rate to some
market interest rate or index
- required monthly payments can change over the life of the mortgage, although they may
initially be fixed for a set time period.
• For example, hybrid ARMs: 5/1 (fixed rate for 5 years, then rate reset every year) are popular
in the US.
- borrowers assume interest rate risk with an ARM
- ARMs can increase default risk
• Canada. All mortgages in Canada are ARMs from the US perspective. - Fixed rate mortgages:
the rate resets only at the end of the term (every 3-10 years, 5yrs most typical). - Variable rate
mortgages: the rate changes any time the prime rate changes
Mortgage types correct answers • Subprime mortgages
- Subprime mortgages are mortgages whose borrowers do not qualify for a 'prime' credit rating
because of their low FICO credit scores (arising from prior credit problems, such as
delinquencies and defaults; or they may simply lack sufficient credit history or have insufficient
income).
- Beginning in 2006, problems in the subprime mortgage market led to the financial crisis of
2007 and 2008
• Second mortgage: home equity loan vs. home equity line of credit (HELOC)
- Are similar in that they are loans secured by the property value.
- Second mortgage is a subordinated claim to the first mortgage
- Home equity loan is lump sum vs. HELOC is a line of credit
• Reverse-annuity mortgages (RAMs)
