RESIDENTIAL FINANCIAL ANALYSIS Chapter Objectives RESIDENTIAL FINANCIAL ANALYSIS Chapter Objectives Calculate the incremental cost of borrowing Evaluate the effect of prepayment penalties, origination fees and other charges Calculate the market value of an outstanding mortgage loan Below market financing and effect on sales price

Incremental Borrowing Cost Loan AmtPayment 13% $ 90,000$ ALT. 12% 80, Difference$ 10,000$

n= 25x12= 300 PV= 10,000 PMT= $ FV= 0 i= 20.57% Incremental cost of borrowing weighted average= 12.95% Calculator Solution

Early Repayment Loan Amount Monthly Payment Loan Balance- after five years 13% $ 90,000$ $ 86, % 80, , Difference$ 10,000$ $ 10,117.32

Calculator Solution n= 5x12 = 60 PV= 10,000 PMT= $ FV= 10, i= % or (annual)

Origination Fees Net LoanMonthly Payment 13%$ 87,300 ( 90,000) $ % 78,400 (80,000) Difference$ 8,900$

Calculator Solution n= 25x12= 300 PV= 8900 PMT= $ FV= 0 i= or $23.18

Loan Refinancing and Early Payment Cost to Refinance Prepayment Penalty$ 1580 Origination Fee 2500 Recording 25 Total$ 4105

Loan Refinancing and Early Payment Continued Monthly payments, existing loan, ($80,000) (15%) (30 years) $ Monthly payments, new loan, ($78,976.50) (14%) (25 years) Difference$ 60.87

Loan Refinancing and Early Payment Continued Loan Balance, 15 th year- existing $ 72,272 Loan Balance, 10 th year- new loan 71,386 Difference$ 886

Calculator Solution n= 10x12= 120 PV= $ 4105 PMT= FV= 889 i= 14.21

Early Loan Repayment: Lender Inducements Original loan, 15 years, 8% $ 75,000 Balance of loan, 10 years 35,348 Payments Current Rate 12% Lender Inducement$ 2,000

Calculator Solution n= 5x12 = 60 PV= PMT= $ FV= 0 i= Is this attractive to the borrower?

Market Value of a Loan Loan Amount$ 80,000 Interest Rate 10% Term (five years old) 20 years Payments$

Calculator Solution Loan Balance: n= 15x12= 18 i= 10% /12=.8333 PMT= $ FV= 0 PV= $ 71,842 Market Value Change i to 15% i= 15% /12 = 1.25 PV= $ 55,161

Effect of Below Market Financing Down Payment Payment Market rate loan $ 30,000$ Loan Assumption 35, Difference$ 5,000$ 85.63

Calculator Solution n= 15x12= 180 PV= $ 5000 PMT= $ i= % or (

Wrap Around Loans Used to obtain additional financing while keeping an existing loan in place

Existing loan Interest rate Remaining term $ 90,000 8% 15 years Current value LTV $ 150,000 60% Additional loan amount LTV $ 30,000 80% Market Rate existing loan Market Rate 2 nd Mortgage 11.5% 15.5% New wrap around loan (20,000) (10%) (15 years) $ 1, Existing loan Difference $

Calculator Solution n= 15x12 = 180 PV= $ 30,000 PMT= $ FV= 0 i= 15.46