1. Introduction to Real Estate Finance
Lecture 13
Introduction to
Real Estate Finance

2. Equity Capital v. Debt Capital
Equity Capital: Personal funds, earned value
Debt Capital: Borrowed Funds

3. Equity Capital v. Debt Capital
Total Capital, or Purchase Price, or Property Value
Equity Capital, or Down Payment, or Equity Interest
Debt Capital, or Mortgage Loan, or Loan Balance +

4. Equity Capital (“Down Payment”)
Savings
Funds saved for real estate investments/use
Unsecured Loan
No collateral required
Secured Loan
Collateral required (stocks, other real estate, cars, etc.)
Sweat Equity
Non-monetary participation in a real estate property or transaction

5. Debt Capital
Mortgage
Mortgagor: Creates debt, promises to repay, gives security instrument to lender
Mortgagee: Receives security instrument, accepts borrower’s offer to create and repay financial obligations

6. Debt Capital: Fixed-Rate Mortgages
Mortgage interest rate is common throughout the term of the mortgage
Loan maturity date set at loan origination, and does not change during the duration of the loan (unless prepayment occurs)
P & I payments remain constant throughout the life of the loan
Amortization: Loan is fully repaid at the end of loan duration (no balance due)

7. Debt Capital: Fixed-Rate Mortgages
PRINCIPAL + INTEREST = DEBT SERVICE
Key to Amortization: As the loan period moves towards maturity, a greater allocation of the debt service is allocated to principal instead of interest. In other words, you pay less interest on the loan as the loan matures.

8. FRM: Amortization of Debt Service

9. FRM: Amortization Calculations
EXAMPLE LOAN ASSUMPTIONS:
Loan Amount: $100,000
Interest Rate: %
Term to Maturity: Years
Monthly Debt Service: $733.76
Frequency of Debt Service: MONTHLY

10. FRM: Amortization Calculations
Step One: Calculate the “debiting factor” for the loan
Monthly Debiting Factor = Annual Interest Rate
# of Payments/Year
For Example: / 12 =

11. FRM: Amortization Calculations
Step Two: Determine allocation for Mortgage Interest
$100,000 Loan Balance for Month One
x Debiting Factor
$ Mortgage Interest for Month One

12. FRM: Amortization Calculations
Step Three: Determine allocation for Mortgage Principal
$ Monthly Debt Service
- $ Mortgage Interest for Month One
$ Mortgage Principal for Month One

13. FRM: Amortization Calculations
Step Four: Calculate New Loan Balance
$100,000 Loan Balance for Month One
- $ Principal Amortization for Month One
$ 99,933 Loan Balance for Month Two

14. FRM: Amortization Calculations
CALCULATE AMORTIZATION ALLOCATIONS FOR
MONTH TWO, AND THE NEW LOAN BALANCE FOR
MONTH THREE

15. FRM: Amortization Calculations
Step One: Calculate the “debiting factor” for the loan
Monthly Debiting Factor = Annual Interest Rate
# of Payments/Year
For Example: / 12 =
REMAINS CONSTANT

16. FRM: Amortization Calculations
Step Two: Determine allocation for Mortgage Interest
$ 99,933 Loan Balance for Month Two
x Debiting Factor (remains constant)
$ Mortgage Interest for Month Two

17. FRM: Amortization Calculations
Step Three: Determine allocation for Mortgage Principal
$ Monthly Debt Service
- $ Mortgage Interest for Month Two
$ Mortgage Principal for Month Two

18. FRM: Amortization Calculations
Step Four: Calculate New Loan Balance
$ 99,933 Loan Balance for Month Two
- $ Principal Amortization for Month Two
$ 99,865 Loan Balance for Month Three

19. FRM: Amortization Calculations
MONTH ONE MONTH TWO
Loan Balance: $100,000 $99,933
Mortgage Interest: $ $666.22
Mortgage Principal: $ $ 67.54

20. Amortization Schedule

21. Legal Issues of Mortgage Loans
Lecture 13
Legal Issues of Mortgage Loans

22. Foreclosure: Title Theory v. Lien Theory States
Title Theory: Legal title conveyed to the lender to secure the debt, but the mortgagor (borrower) retains possession and equitable title.
Lien Theory: Mortgagor holds the legal and equitable title and gives the lender a lien (claim) against the property. **Florida is a lien theory state**

23. Loan Assumption and Assignment
Assumption: Occurs when a buyer purchases equity in real estate, and takes over (“assumes”) the payments due on a remaining loan balance
Qualifying vs. Non-Qualifying
Assignment: Occurs when a lender sells a loan to another lender

24. “Mortgage” v “Promissory Note”
Lecture 13
“Mortgage” v “Promissory Note”

25. Mortgage v. Promissory Note
The legal instrument giving the lender the right to sell the real estate if a borrower defaults on the loan.
Four Requirements:
1. Competent Parties
2. Consideration
3. Object of the contract is Legal
4. Meeting of the minds (offer/accept.)
Serves as evidence of debt and is the borrower’s personal IOU to repay

26. Optional Types of Loans
Lecture 13
Optional Types of Loans

27. Some Optional Loan Types
Blanket Mortgage
Used for several parcels of property
Release Clause
Package Mortgage
Loans for both real estate and personal property
Open-End Mortgage
Provides for future advances of additional funds
Used in “Fast Track” construction
Seller Financing

28. Obtaining the Benefits of Lower Interest Rates
Lecture 13
Obtaining the Benefits of Lower Interest Rates

29. Refinancing
“Taking out a replacement mortgage at prevailing market interest rates and using at least part of the money from the new loan to repay the current mortgage indebtedness.”

30. Benefits of Refinancing
Lower Interest Rate
Lower monthly debt service
Lower debt service allows borrowers to decrease loan durations, whereby paying off loan earlier
Money to pay off other debts
Money for Capital Improvements or other investments

31. Costs of Refinancing Loan Origination Fees (optional) Credit Report
Appraisal
Legal Fees
Discount Points (optional)
These fees can typically be paid in cash or “rolled into” the loan amount

32. Feasibility of Refinancing
Savings in monthly payments w/ new loan
Any increases in up-front cash available if new loan is greater than existing
Up-front closing costs required
Borrower’s income due to associated income tax consequences
Investment opportunities available to borrower
How long borrower expects to keep the loan
Prepayment penalties on existing loan