Mortgage Bank Real Estate Fin
Mortgage Bank Real Estate Fin FIN 4713
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This 3 page Class Notes was uploaded by Miss Candida Hoppe on Thursday October 29, 2015. The Class Notes belongs to FIN 4713 at University of Texas at San Antonio taught by Staff in Fall. Since its upload, it has received 15 views. For similar materials see /class/231331/fin-4713-university-of-texas-at-san-antonio in Finance at University of Texas at San Antonio.
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Date Created: 10/29/15
Fin 4713 CHAPTER 6a Additional Material MORTGAGE FINANCIAL ANALYSIS I Objectives I Calculate the incremental cost of borrowing I Evaluate the effect of prepayment penalties origination fees and other charges I Calculate the market value ofan outstanding mortgage loan I Below market financing and effect on sales price EX 6a1 Incremental Borrowing Cost You are wondering how large ofa down payment to make on the house you are purchasing Two 25yr loans are available Alt lfor an 80 LTV has a rate of 12 and Alt ll fora 90 LTV has a 13 rate What is the incremental incremental 10 IYRPMT17247 PV10000 N300 2057 EX 6a2 Incremental Borrowing Cost What if there are 2 points charged on the ALT ll loan The payment does not change but less cash is disbursed making the incremental cost higher What is the incremental cost of borrowing the incremental amount7 IYRPMT17247 PV8200 N300 2519 I EX 6a3 Early Repayment data from EX 6a1 Loan Monthly Loan Amount Payment Balan ce after five years ALTI 90000 101505 8663988 13 ALT 80000 84258 7852258 12 Difference 10000 35 172 47 1011732 I EX 6a3 Calculator Solution I YRPV10000 N60 PMT17247 FV1011732 I YR 2083 I Re nancing an Existing Loan I To Withdraw equity from the house possibly to pay off other debt in Such loans are seen as riskier than other re nances as it shows the borrower has other nancial payments I To improve the house a Add rooms a swimming pool redo kitchen etc I To shorten the amortization period I To lowerthe payments in May re nance to an option ARM or teased ARM I Re nancing an Existing Loan cont I In response to lower interest rates in The optimal time to re nance a mort age in response to lower interest rates is a very complex nancial decision Why in Balance may increase if you borrow money for the fees n Term may lengthen re nance to same term as your original term i If there are nofees re nance whenever interest rates fall I Yield maintenance agreements and shorter terms creates fewer refinance opportunities A ARM Indexes Over Time a v a a a 3 3 35 3 9 3 3 6 3 3 3 3 6 3 9 335 93 3 3 Example 6a4 Re nancing a loan in response to lower interest rate I You currently have an 8 30year loan your took out 2 years ago You can refinance this at 65 with 3 points in fees to a new 28 year loan You expect to keep this new loan for 2 years Your original note was for 80000 and you will take the closing costs from your savings account that is currently paying 5 Is this a good choice Example 6a5 Re nancing a loan in response to lower interest rate I You currently have an 8 30year loan you took out 2 years ago You can refinance this at 65 with 3 points in fees to a new 30year loan You expect to keep this new loan for2 years Your original note was for 80000 and you will add the closing costs to your existing loan balance Is this a good choice l Predatory LendingEquity stripping I Part of root the subprime crisis of today is from equity stripping 1 Equity stripping occurs when a loan is refinanced to another loan typically with lower payments but there are a lot of fees with the new loan that are borrower so that the loan balance is signi cantly increased equity stripping The payment may be lower ue o op ion type characteristics or teasers The fees for the new loan may include a prepayment penalt on the previous loan and possibly a prepayment penalty on the new loan Why is the re nance decision so dif cult I Biggest reason is that we cannot predict the future of interest rates or how long we will keep a new loan I Most refinance calculators do not understand this and are thus based on static assumptions that interest rates will remain constant at their current level and that you can predict how long you will keepthe loan for I When interest rates fall mortgage brokers will troll legal records to find prospects Early Loan Repayment Lender lnducements I Bonds are freely traded so that when interest rates rise bond values fall If interest rates rise the difference between the statutory balance on the loan and its market value will diverge Occasionally lenders will offer borrowers an inducement to pay off their loan a What are the risks of this strategy Market value of existing mortgage I The market value ofa loan is the present value of its expected payments I Just as the market value of bond fluctuate as interest rates change so will the value of a mortgage I The expected payments is highly dependent on the prepayment assumption When valuing bonds one typically assumes they are held to maturity EX 6a6 Market Value ofa Loan I You took out a 9 30year mortgage for 160000 four years ago Current rates are 5 I What is the market value of this loan if in You keep the loan until maturity in You payoff the loan 4 years from now I Realistically how does the market value this loan I What if the current rate is 10 EX 6a7 Value of Financing Incentive I Condo s are selling very slowly in Taos NM and probably lots of other places La Vida Feliz possibly taking its clues from furniture stores is offering no down payments and no payments for a year What is the value of this inducement to the buyer I Assumptions 250000 unit when the 30 year note rate is 7 in Why does the builder notjust cut the price EX 6a8 Builder Buy down I To move inventory a builder if offering either a mortgage at 6 when rates are 65 or a 21 buy down 2 lower interest rate the first year followed by a 1 buy down the second year What are the values ofthese alternative financing alternatives 160000 note amount
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