Real Estate Finance & Mortgages Flashcards

On an adjustable-rate mortgage, the fully indexed interest rate equals:

Answer: Index plus margin

An ARM's fully indexed rate is the current index value plus the lender's fixed margin.

An investor puts $150,000 cash into a rental property that yields $15,000 annual pre-tax cash flow after debt service. What is the cash-on-cash return?

Answer: 10%

Cash-on-cash = annual pre-tax cash flow / cash invested = $15,000 / $150,000 = 10%.

Private mortgage insurance (PMI) is typically required on a conventional loan when the borrower:

Answer: Makes a down payment of less than 20%

Conventional lenders generally require PMI when LTV exceeds 80%, i.e., less than 20% down.

On a fully amortizing fixed-rate mortgage, how are the early monthly payments allocated?

Answer: Mostly to interest

Early payments are interest-heavy because interest is calculated on a large outstanding balance.

What distinguishes a balloon mortgage?

Answer: A large lump-sum payment of the remaining balance is due at maturity

A balloon loan's payments do not fully amortize it, leaving a large balance due at the end of the term.

A borrower pays 2 discount points on a $300,000 loan. How much do the points cost?

Answer: $6,000

One point equals 1% of the loan amount, so 2 points = $6,000.

A property has operating expenses of $200,000, annual debt service of $300,000, and gross potential income of $625,000. What is the break-even occupancy?

Answer: 80%

Break-even = (operating expenses + debt service) / gross potential income = $500,000 / $625,000 = 80%.