© 2011 Cengage Learning created by Dr. Richard S. Savich. California Real Estate Finance Bond, McKenzie, Fesler & Boone Ninth Edition Chapter 13 Basic Mathematics of Real Estate Finance

© 2011 Cengage Learning created by Dr. Richard S. Savich. Objectives After completing this chapter, you should be able to: Differentiate between a straight note (interest-only) and an amortized note. Explain how financial calculators and computers are used to determine monthly payments, principal and interest allocation, balloon payments, price and yields on notes, plus a variety of other real estate calculations. Discuss how biweekly loan payments differ from traditional monthly payments. Understand what inputs are used to calculate the Annual Percentage Rate (APR) for a real estate loan.

© 2011 Cengage Learning created by Dr. Richard S. Savich. Outline Review of the basic components of a real estate loan The real world of financial calculators and computers Illustrated use of Calculated Industries Qualifier Plus IIIX Real Estate Calculator Annual Percentage Rates

© 2011 Cengage Learning created by Dr. Richard S. Savich. Review of the Basic Components of a Real Estate Loan Interest Charge or price, expressed as dollars, paid for the use of money Principal Amount of money borrowed Rate Percentage of interest charged on the principal and usually expressed as an annual rate Time Denotes the length of the loan and the frequency of payments

© 2011 Cengage Learning created by Dr. Richard S. Savich. Review of Promissory Notes Straight Note (Interest-Only) Interest-Only payments Principal due in lump sum Amortized loan Installment Note (Fully amortized) Principal and interest Continue until entire obligation is repaid Installment Note (Partially amortized, with balloon payment) Principal and interest Not paid off by due date Balloon at end

© 2011 Cengage Learning created by Dr. Richard S. Savich. How to Compute Amortized Loan Payments Use Amortization Book Locate interest percentage page (See Table 13.1) Locate amount of loan Locate term or number of years Intersection is monthly payment Or use Table 13.2 for $1,000 Locate term Locate rate of interest Intersection is payment Then multiply times amount of loan

© 2011 Cengage Learning created by Dr. Richard S. Savich. The Real World of Financial Calculators and Computers Specialized for finance Computer programs Cell phones Texas Instruments BA-II Plus Hewlett-Packard 12C Calculated Industries’ Qualifier Plus IIIx

© 2011 Cengage Learning created by Dr. Richard S. Savich. Illustrated Use of Calculated Industries Qualifier Plus IIIx Real Estate Calculator Keys Term (length of time) Int (Interest rate) Loan Amt (Amount of original principal) PMT (Payment, annual, monthly or daily) [Shift] [Loan Amt] (Future Value)

© 2011 Cengage Learning created by Dr. Richard S. Savich. Loan payments The Qualifier Plus IIIx calculator computes any type of loan payment. Annual, semiannual, quarterly, monthly, biweekly, weekly, or daily. All financial keys must be in the same time frame! Example: On a $100,000 loan at 10 percent for 30 years, what is the monthly payment?

© 2011 Cengage Learning created by Dr. Richard S. Savich. Making larger loan payments How fast will a loan be paid off if larger monthly payments are made? Example: On a $100,000 loan at 10 percent for 30 years, what is the monthly payment?

© 2011 Cengage Learning created by Dr. Richard S. Savich. Interest and Principal Allocation Borrowers want to know the breakdown of each payment into interest and principal, and what the remaining balance is. Example: Assume a $100,000 loan at 10 percent for 30 years. What is the monthly payment? What is the remaining loan balance? How much of the first payment is principal? Interest?

© 2011 Cengage Learning created by Dr. Richard S. Savich. Principal and interest allocation for 12 months Example: Using the Qualifier Plus IIIx, assume a $100,000 loan at 10 percent for 30 years. What is the monthly payment? What is the remaining loan balance after 12 payments? What is the principal paid for 12 months? What is the interest paid after making 12 monthly payments?

© 2011 Cengage Learning created by Dr. Richard S. Savich. Balloon payments Remaining loan balance and outstanding loan balance. To solve for the balance on a loan after a series of payments, all four parts of a loan must be in the calculator: Term Interest Loan Amount Payment Example: Use the Qualifier Plus IIIx for a $100,000 loan at 10 percent amortized for 30 years, but due in five years. What will be the balance after five years?

© 2011 Cengage Learning created by Dr. Richard S. Savich. More Complicated Calculations Calculating loan payments that include PITI See pp Calculating monthly income needed to qualify for a loan See pp Calculating what a buyer can afford to borrow and the price range of homes See pp Finding the price of a note when you know the desired yield See pp Calculating the yield when you know the discount price of the note See p. 368

© 2011 Cengage Learning created by Dr. Richard S. Savich. Biweekly loan payments Payments made every two weeks Approximates 13 payments per year Example: Using the Qualifier Plus IIIx, for a $100,000 loan at 10 percent for 30 years, what are the biweekly payments?

© 2011 Cengage Learning created by Dr. Richard S. Savich. Annual Percentage Rates Truth-in-Lending Law Must disclose Total scheduled to be paid over 30 years ($ x 360 months) $264,155:25 Less : Original loan amount −100;000:00 Total interest paid over scheduled life of the loan $164,155:25 Estimated costs of acquiring the financing APR Example: Assume a $100,000 loan at 8 percent interest for 30 years, and the lender charges 1.5 points, plus $1,000 in other financing fees covered by the Truth-In-Lending Law. What is the APR?

© 2011 Cengage Learning created by Dr. Richard S. Savich. Questions and Comments?