Midterm Practice Questions – Fall 2014 1) An adjustable rate mortgage with a teaser start rate of 1.5%, an index of six month LIBOR, a margin of 2.0%, and periodic and lifetime caps of 2/6 with semi-annual adjustments, would have a maximum interest rate of what at the beginning of the fourth loan year if six month LIBOR is 4.5% at that time? a) 5.5% b) 6.5% c) 7.5% d) 8.5% 2) An adjustable rate mortgage with a teaser start rate of 1.5%, an index of six month LIBOR, a margin of 2.0%, and periodic and lifetime caps of 2/6 with semi-annual adjustments, would have a maximum interest rate of what at the beginning of the fourth loan year if six month LIBOR is 6.5% at that time? a) 5.5% b) 6.5% c) 7.5% d) 8.5% 3) An adjustable rate mortgage with a teaser start rate of 1.5%, an index of six month LIBOR, a margin of 2.0%, and periodic and lifetime caps of 2/6 with semi-annual adjustments, would have a maximum interest rate of what at the beginning of the second loan year if six month LIBOR is 6.5% at that time? a) 5.5% b) 6.5% c) 7.5% d) 8.5% 4) If the loan to value ratio is 75%, the stated annual interest rate is 6%, the loan term is 30 years fully amortized, and the down payment is $400,000, what is the purchase price of the property? a) $400,000 b) $1,200,000 c) $1,600,000 d) $2,000,000 5) Referring to the prior question, what is the monthly payment on the loan? a) $1,798.65 b) $2,398.20 c) $7,194.61 d) $9,592.81 6) What is the APR on a 30 year fully amortized fixed rate loan in the amount of $1,000,000 if the stated annual interest rate is 4.5% and the lender charges 1 point as an origination fee, $180 for a credit report and $360 for an appraisal? a) 4.68% b) 4.59% c) 4.50% d) 4.41% 7) If a lender wants to achieve an APR of approximately 4 ¼% on a 30 year fixed rate loan for $750,000 with a stated annual interest rate of 4.0 % and no other fees or costs to the borrower, how many points should the lender charge the borrower? a) 1 b) 2 c) 3 d) 48) An investor is considering a commercial property acquisition at a price of $10,000,000 with the following annualized financial information: Gross rental and other income …………$ 800,000 Operating Expenses ……………………$ 250,000 Annual Tax Depreciation ………………$ 120,000 Assumable interest-only mortgage …….$3,000,000 at 6% per year What is the acquisition cap. rate? a) 8.0% b) 5.5% c) 4.3% d) 2.5% 9) Referring to the prior question, what is the property’s taxable income? a) $800,000 b) $550,000 c) $430,000 d) $250,000 10) What is the DSCR for a $2.5 million property generating a 7.5% before tax annual return on equity with a $1.5 million ten year interest-only first mortgage at a 5% annual interest rate? a) 2.00 b) 1.83 c) 1.33 d) 0.75 11) The total rent paid by a tenant under a commercial property lease can be higher than the base rent amount if the lease contains a: a) CPI clause b) Percentage rent clause c) Triple net rent clause d) All of the above 12) If the unleveraged internal rate of return on a commercial property investment is 9% annualized and the total cost of borrowing against the property is 7.5% per year payable monthly, the leveraged internal rate of return on the investment will be: a) Higher than 9% b) Lower than 9% c) Exactly 9% d) Depends on the DSCR ratio 13) Appraisers of residential properties primarily use which of the following approaches to valuation: a) Cost Approach b) Income Approach c) Sales Comparison Approach d) Discounted Present Value Approach 14) When a borrower pays less than the required monthly P&I payment, the borrower will be in default under the loan, and there will be negative amortization with the loan balance increasing if the amount actually paid is: a) More than the monthly principal amortization b) Less than the monthly principal amortization c) More than the monthly accrued interest d) Less than the monthly accrued interest15) A constant payment mortgage has: a) Constant monthly payments and a fixed interest rate b) Variable monthly payments and a fixed interest rate c) Constant monthly payments and a variable interest rate d) Variable monthly payments and a variable interest rate 16) A higher LTV loan: a) Reduces the risk to the borrower and reduces the risk to the lender b) Reduces the risk to the borrower and increases the risk to the lender c) Increases the risk to the borrower and reduces the risk to the lender d) Increases the risk to the borrower and increases the risk to the lender 17) A DSCR ratio that is less than 1.0: a) Is safer for the lender than a higher DSCR b) Provides more debt service coverage for the borrower c) Always leads to a default on the mortgage and foreclosure of the property d) Means the property’s NOI is insufficient to pay the monthly debt service 18) A loan agreement that contains a prepayment lockout clause: a) Is a benefit for the borrower b) Does not allow the borrower to prepay the loan during a specified period of time c) Requires the borrower to pay a significant penalty to prepay the loan before maturity d) Prevents the lender from negotiating a prepayment with the borrower 19) Rising interest rates generally: a) Increase cap rates and reduce property values b) Reduce cap rates and increase property values c) Increase cap rates and increase property values d) Reduce cap rates and reduce property values 20) In periods of “easy money”, lenders underwrite loans with: a) Higher LTVs and higher DSCRs b) Lower LTVs and higher DSCRs c) Lower LTVs and lower DSCRs d) Higher LTVs and lower