Constant Annual Percent (Mortgage Constant)

### What does the Constant Annual Percent represent in a mortgage? - [x] The ratio of annual debt service to the original loan amount - [ ] The monthly interest rate of the mortgage - [ ] The fluctuation percentage in loan payments - [ ] The annual property tax as a percentage of the loan amount > **Explanation:** The Constant Annual Percent, also known as the Mortgage Constant, represents the ratio of the annual debt service (total annual payments for interest and principal) to the original loan amount. ### What components are included in the Annual Debt Service when calculating the Mortgage Constant? - [x] Both principal and interest - [ ] Only principal - [ ] Only interest - [ ] Principal, interest, and property tax > **Explanation:** The Annual Debt Service includes both the principal and interest components of the loan payment. ### Is the Mortgage Constant affected by changes in the interest rate alone? - [ ] Yes, it changes with the interest rate. - [x] No, it remains fixed as it is based on the original loan terms. - [ ] Yes, but only if the interest rate doubles. - [ ] No, it changes daily. > **Explanation:** The Mortgage Constant remains fixed based on the original loan and does not change with fluctuations in interest rates during the loan term. ### What does a 7% Mortgage Constant indicate if the original loan amount is $500,000? - [ ] The original loan was issued at a 7% interest rate. - [x] The annual debt service is $35,000. - [ ] The principal is amortized over 7 years. - [ ] The value of the property is $35,000. > **Explanation:** A 7% Mortgage Constant on a $500,000 loan indicates that the annual debt service is $35,000 (0.07 * $500,000 = $35,000). ### How does the Mortgage Constant help in comparing loan options? - [x] By providing a straightforward comparison of annual debt service costs related to the initial loan amounts. - [ ] By showing the monthly payment amount. - [ ] By comparing property taxes. - [ ] By indicating the exact payoff date. > **Explanation:** The Mortgage Constant helps compare different loan options by showing the annual debt service as a percentage of the original loan amount, making it easier to assess cost. ### Which of the following best defines the relationship between the Mortgage Constant and loan amortization? - [x] The Mortgage Constant accounts for annual debt service over the life of the loan. - [ ] The Mortgage Constant changes with each amortization period. - [ ] The Mortgage Constant determines the loan amortization schedule. - [ ] There is no relationship between them. > **Explanation:** The Mortgage Constant helps understand the spread of annual debt service over the loan term, reflecting the fixed annual payments resulting from loan amortization. ### Why might a borrower prefer a loan with a lower Mortgage Constant? - [x] To minimize annual debt service payments relative to the loan amount. - [ ] To maximize principal repayment at the end of the term. - [ ] To increase the total interest paid over the loan. - [ ] To shorten the loan term. > **Explanation:** Borrowers generally prefer a loan with a lower Mortgage Constant to reduce their annual debt service payments in relation to the loan amount. ### When considering a higher Mortgage Constant, what can borrowers likely expect regarding debt service? - [x] Higher annual debt service payments. - [ ] Lower total interest over the loan term. - [ ] Shorter loan duration. - [ ] Variable monthly payments. > **Explanation:** A higher Mortgage Constant typically signifies higher annual debt service payments, affecting the borrower's cash flow. ### How does the Mortgage Constant aid lenders? - [x] By providing insight into the stability of annual loan repayment. - [ ] By calculating the principal repayment schedule. - [ ] By adjusting the loan amortization period. - [ ] By influencing the foreclose value of properties. > **Explanation:** The Mortgage Constant aids lenders by providing a clear picture of the expected annual repayment relative to the loan amount, ensuring assessment of loan stability. ### If a borrower has a loan with a 10% Mortgage Constant, what is their annual debt service if the original loan amount is $250,000? - [x] $25,000 - [ ] $2,500 - [ ] $50,000 - [ ] $2,000 > **Explanation:** A 10% Mortgage Constant on a $250,000 loan results in an annual debt service of $25,000 (0.10 * $250,000 = $25,000).