SOFE Exam AFE Topic 1 Question 55 Discussion

Actual exam question for SOFE's AFE exam

Question #: 55
Topic #: 1

[All AFE Questions]

Prepayment of a conventional mortgage loan, prior to its specified maturity, is discouraged through the general market acceptance of significant prepayment penalties. Often these penalties are calculated so that when prevailing market interest rates are:

ALower than the rate on the loan being repaid the borrower has to make up the interest rate differential and the lender is essentially ''made whole'' for a potential loss of interest.

BGreater than the rate on the loan being repaid the borrower has to make up the interest rate differential and the lender is essentially ''made whole'' for a potential loss of interest.

CEqual to the rate on the loan being repaid the borrower has to make up the interest rate differential and the lender is essentially ''made whole'' for a potential loss of interest.

DLower than the rate of interest being paid to the borrower has to make up the interest rate differential and the lender is essentially ''made whole'' for a potential loss of interest.

Show Suggested Answer

Suggested Answer: D

by Gilma at Mar 21, 2023, 08:16 PM

Limited Time Offer

25%

Off

Get Premium AFE Questions as Interactive Web-Based Practice Test or PDF

Contribute your Thoughts:

Submit Cancel

Ashley

26 days ago

Prepayment penalties? More like 'prepayment pain-alties'! Lenders are really squeezing every last penny out of these borrowers, aren't they?

upvoted 0 times

...

Jackie

1 months ago

Wait, wait, wait... if the rates are equal, the borrower still has to make up the difference? That's just cruel! Where's the justice in this mortgage world?

upvoted 0 times

Jeanice

18 days ago

User 3: It's all about protecting the lender's interests, even if it seems unfair to the borrower.

upvoted 0 times

...

Sabina

21 days ago

User 2: I know, it's like you're punished for trying to pay off your loan early.

upvoted 0 times

...

Jolene

26 days ago

User 1: Yeah, it's pretty rough. Those prepayment penalties can really add up.

upvoted 0 times

...

Sharen

1 months ago

Okay, let me think this through. If market rates are lower, the borrower has to make up the difference to keep the lender happy. Sounds like a win-win for the lender!

upvoted 0 times

...

Staci

1 months ago

Hmm, interesting. So the lender wants to be compensated for any potential loss of interest when the borrower pays off the loan early. Gotta love those prepayment penalties!

upvoted 0 times

Harley

7 days ago

B) Greater than the rate on the loan being repaid the borrower has to make up the interest rate differential and the lender is essentially ''made whole'' for a potential loss of interest.

upvoted 0 times

...

Clarence

20 days ago

I know, those penalties can really add up.

upvoted 0 times

...

Pamella

1 months ago

A) Lower than the rate on the loan being repaid the borrower has to make up the interest rate differential and the lender is essentially ''made whole'' for a potential loss of interest.

upvoted 0 times

...

Belen

2 months ago

Aha! The correct answer is B. When the prevailing market interest rates are greater than the rate on the loan being repaid, the borrower has to make up the interest rate differential to keep the lender 'made whole'.

upvoted 0 times

Truman

22 days ago

Yeah, it's important to understand how they work before paying off a loan early.

upvoted 0 times

...

Cherilyn

29 days ago

I didn't know that about prepayment penalties.

upvoted 0 times

...

Merilyn

2 months ago

That's an interesting perspective, Fausto. I can see your point. But I still think A makes more sense in this scenario.

upvoted 0 times

...

Fausto

2 months ago

I disagree, I believe the answer is B. The borrower has to make up the interest rate differential when prevailing market interest rates are greater than the rate on the loan being repaid.

upvoted 0 times

...

Merilyn

2 months ago

I think the answer is A, because the borrower has to make up the interest rate differential when prevailing market interest rates are lower than the rate on the loan being repaid.

upvoted 0 times

...