Topic 6 Exercises - Solutions
True/False
1. People who are financially able to buy a house may choose to rent to avoid the T
time and money commitment needed to maintain a house.
2. It is recommended to keep the rent at less than 30% of the household income. T
3. “P Plan” is generally considered to be more fluctuating than “H Plan”. F
4. Home improvements must increase the selling price of the home. F
5. A conventional mortgage refers to a home loan with adjustable-rate and F
variable-payment.
Multiple Choice
6. A common advantage associated with home ownership is ______.
A. financial benefits
B. ease of mobility
C. limited financial risks
D. no maintenance responsibility
Ans: A
7. From the Step 2 of the home-buying process, the _____ of a home is a very important factor.
A. price
B. style
C. location
D. desired features
Ans: C
8. The major factor that affects a person’s qualification for a mortgage is ______.
A. current interest rates
B. the applicant’s credit rating
C. the value of the property being purchased
D. the source of the down payment funds
Ans: B
9. According to the most recent guideline of the Hong Kong Monetary Authority, the maximum
loan-to-value (LTV) ratio for all residential mortgage lending is set at ______.
A. 50%
B. 60%
C. 70%
D. 80%
Ans: C
10. A ______ allows a person to borrow on the paid-up value of a home.
A. conventional mortgage
B. reverse mortgage
C. home equity loan
D. buy-down
Ans: C
Short Questions
11. Prepare an amortization table for a 3-year loan of $75,000. The interest rate is 9% per year,
and the loan calls for equal annual payments. How much interest is paid in the third year?
How much total interest is paid over the life of the loan?
The annual loan payment:
1
1−
(1+0.09)3
$75,000 = 𝐶 [ ]
0.09
C = $29,629.11
Year Beginning Yearly Interest Principal Ending
Balance Payment Paid Paid Balance
1 $75,000.00 $29,629.11 $6,750.00 $22,879.11 $52,120.89
2 $52,120.89 $29,629.11 $4,690.88 $24,938.23 $27,182.67
3 $27,182.67 $29,629.11 $2,446.44 $27,182.67 $0
Interest Paid in the 3rd Year = $2,446.44
Total Interest Paid = $6,750.00 + $4,690.88 + $2,446.44 = $13,887.32
12. What would be the monthly mortgage payments for each of the following situations?
(a) $120,000, 15-year loan at 5%
(b) $86,000, 30-year loan at 4.5%
(c) $105,000, 20-year loan at 4%
(d) What relationship exists between the length of the loan and monthly payment? How
does the mortgage rate affect the monthly payment?
Monthly Mortgage Payment:
1
1−
(1+0.05/12)180
(a) $120,000 = 𝐶 [ ]
0.05/12
C = $948.95
1
1−
(1+0.045/12)360
(b) $86,000 = 𝐶 [ ]
0.045/12
C = $435.75
1
1−
(1+0.04/12)240
(c) $105,000 = 𝐶 [ ]
0.04/12
C = $636.28
(d) Longer mortgage terms mean a lower monthly payment. As rates increase, a higher
monthly payment is required.
13. What are the advantages of renting over buying a new home?
The financial stress is lower than buying a flat as only a deposit equivalent to two
months' rent plus a month's rent in advance are required.
Flexible tenancy period. After the lease's fixed term (when neither you nor the landlord
can end the tenancy), termination requires just one-month's notice. As a result, you can
move, depending on your financial or other circumstances.
Less expenses and trouble, as landlords are usually responsible for repairs, rates and
management fees, and appliances, such as air conditioners.
14. How can the quality of a school system benefit even homeowners in a community who do
not have school-age children?
The quality of a school system is an important factor affecting home prices in a community.
By maintaining quality schools, all homeowners in an area benefit from stable and
increasing property values.
15. For a customer with a prudent attitude, which one is more suitable, “H Plan” or “P Plan”?
Prime Rate is relatively stable with a lower chance of drastic changes, which would allow a
steadier monthly mortgage repayment amount from a short-term perspective when
compared with HIBOR. Therefore, “P Plan” is more suitable for prudent customers, as it is
easier for them to estimate the interest expenses.
