Key Questions… What? – Identify key terms and concepts that are important to real estate finance decisions Why? – Explain why those terms are important.

Slides:



Advertisements
Similar presentations
Key Questions… What? – Identify key terms and concepts that are important to real estate finance decisions Why? – Explain why those terms are important.
Advertisements

© Mcgraw-Hill Companies, 2008 Farm Management Chapter 17 Investment Analysis.
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner Chapter 18 Real Estate Finance Tools: Present Value and Mortgage Mathematics.
Time Value of Money, Loan Calculations and Analysis Chapter 3.
Interest Rate Factor in Financing Objectives Present value of a single sum Future value of a single sum Present value of an annuity Future value of an.
McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved CHAPTER3CHAPTER3 CHAPTER3CHAPTER3 The Interest Factor in Financing.
Chapter 03: Mortgage Loan Foundations: The Time Value of Money McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
1 CHAPTER 9 Mortgage Markets. 2 CHAPTER 9 OVERVIEW This chapter will: A. Describe the characteristics of residential mortgages B. Describe the common.
McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved CHAPTER4CHAPTER4 CHAPTER4CHAPTER4 Fixed Rate Mortgage Loans.
McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved CHAPTER4CHAPTER4 CHAPTER4CHAPTER4 Fixed Rate Mortgage Loans.
Chapter 04: Fixed Interest Rate Mortgage Loans McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved CHAPTER4CHAPTER4 CHAPTER4CHAPTER4 Fixed Rate Mortgage Loans: Part 2.
Chapter 4: Time Value of Money
Fundamentals of Real Estate Lecture 2 Spring, 2003 Copyright © Joseph A. Petry
McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved CHAPTER6CHAPTER6 CHAPTER6CHAPTER6 Residential Financial Analysis.
Key Questions… What? – Identify key terms and concepts that are important to real estate finance decisions Why? – Explain why those terms are important.
McGraw-Hill/Irwin ©2001 The McGraw-Hill Companies All Rights Reserved 5.0 Chapter 5 Discounte d Cash Flow Valuation.
McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 11 The Time Value of Money.
McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved CHAPTER5CHAPTER5 CHAPTER5CHAPTER5 Adjustable Rate Mortgages.
CHAPTER 9 MORTGAGE MARKETS. Copyright© 2003 John Wiley and Sons, Inc. The Unique Nature of Mortgage Markets Mortgage loans are secured by the pledge of.
Key Questions… What? – Identify key terms and concepts that are important to real estate finance decisions Why? – Explain why those terms are important.
Interest Rates Discuss how interest rates are quoted, and compute the effective annual rate (EAR) on a loan or investment. 2. Apply the TVM equations.
Chapter 7 Interest Rates and Present Value Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin.
Chapter McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. 6 Discounted Cash Flow Valuation.
Chapter 4 Interest Rates  Annual and Periodic Rates  Impact on TVM  Consumer Loans and Monthly Amortization Schedules  Nominal and Real Interest Rates.
CHAPTER FOUR FIXED RATE MORTGAGE LOANS. Chapter Objectives Characteristics of constant payment (CPM), constant amortization (CAM), and graduated payment.
RESIDENTIAL FINANCIAL ANALYSIS Chapter Objectives RESIDENTIAL FINANCIAL ANALYSIS Chapter Objectives Calculate the incremental cost of borrowing Evaluate.
Chapter 4 – Interest Rates  Learning Objectives  Quoting Interest Rates (APR)  Effective Annual Rate (EAR)  TVM formulas with periodic interest rates.
5-1 McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
Fixed Rate Mortgage Loans
McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved CHAPTER5CHAPTER5 CHAPTER5CHAPTER5 Adjustable Rate Mortgages.
Residential Financial Analysis
Chapter 1 Overview What is: Finance? Financial Management? Financial Intermediary Function (the cycle of money)?
Risk, Return, and the Time Value of Money Chapter 14.
ENGINEERING ECONOMICS ISE460 SESSION 8 CHAPTER 4, June 9, 2015 Geza P. Bottlik Page 1 OUTLINE Questions? News? Recommendations Next Homework Chapter 4.
Key Questions… What? – Identify key terms and concepts that are important to real estate finance decisions Why? – Explain why those terms are important.
Mortgage Refinancing Decision Falling interest rates create opportunities for refinancing because the option is now “in the money”. “Out of the money”
McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved Chapter Eighteen Consumer Loans, Credit Cards, and Real Estate Lending.
CORPORATE FINANCE II ESCP-EAP - European Executive MBA 23 Nov p.m. London Various Guises of Interest Rates and Present Values in Finance I. Ertürk.
Chapter 5 Interest Rates. © 2013 Pearson Education, Inc. All rights reserved Discuss how interest rates are quoted, and compute the effective annual.
CHAPTER SEVENTEEN Consumer Loans, Credit Cards, And Real Estate Lending
Chapter McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Valuation and Rates of Return 10.
Chapter 4: Interest Rates
Chapter 5 Interest Rates.
© Prentice Hall, Chapter 4 Foundations of Valuation: Time Value Shapiro and Balbirer: Modern Corporate Finance: A Multidisciplinary Approach to.
Key Questions… What? – Identify key terms and concepts that are important to real estate finance decisions Why? – Explain why those terms are important.
NPV and the Time Value of Money
Chapter 04: Fixed Interest Rate Mortgage Loans McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin ©2001 The McGraw-Hill Companies All Rights Reserved 5.0 Chapter 5 Discounte d Cash Flow Valuation.
Key Questions… What? – Identify key terms and concepts that are important to real estate finance decisions Why? – Explain why those terms are important.
Learning Objectives Power Notes 1.Financing Corporations 2.Characteristics of Bonds Payable 3.The Present-Value Concept and Bonds Payable 4.Accounting.
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 07 Interest Rates and Present Value.
Finance Chapter 6 Time value of money. Time lines & Future Value Time Lines, pages Time: Cash flows: -100 Outflow ? Inflow 5%
Copyright © 2011 Pearson Education, Inc. Managing Your Money.
Copyright © 2010 Pearson Prentice Hall. All rights reserved. Chapter 5 Interest Rates.
5-1 Computing APRs What is the APR if the monthly rate is.5%? What is the APR if the semiannual rate is.5%? What is the monthly rate if the APR is 12%
©2007, The McGraw-Hill Companies, All Rights Reserved 2-1 McGraw-Hill/Irwin Chapter Two Determinants of Interest Rates.
Ms. Young Slide 4-1 Unit 4C Loan Payments, Credit Cards, and Mortgages.
The Time Value of Money Schweser CFA Level 1 Book 1 – Reading #5 master time value of money mechanics and crunch the numbers.
Chapter 4 Fundamentals of Corporate Finance Fifth Edition Slides by Matthew Will McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc.
Chapter 6 Measuring and Calculating Interest Rates and Financial Asset Prices.
Copyright © 2010 Pearson Prentice Hall. All rights reserved. Chapter 5 Interest Rates.
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved McGraw-Hill/Irwin Slide 1 CHAPTER FOUR FIXED RATE MORTGAGE LOANS.
Chapter 15 Mortgage Calculations and Decisions
Real Estate Finance, Spring, 2017
Chapter 5 Interest Rates.
Real Estate Principles, 11th Edition
Bonds Payable and Investments in Bonds
Mortgage Calculations and Decisions
Residential Financial Analysis
Presentation transcript:

Key Questions… What? – Identify key terms and concepts that are important to real estate finance decisions Why? – Explain why those terms are important How? – Illustrate how those terms and concepts are applied in practice

The Basics Mortgages Traditional Finance Methods Alternative Finance Vehicles Fixed rates, variable, CPM, reverse annuity, price level, risks, yields, incremental costs, LTV, refinancing, prepayment Residential, underwriting, closing, settlement, corporate real estate, project and land development financing Course Map Notes, mortgages, default, foreclosure, bankruptcy, time value of money, compounding, yield, IRR Ventures, syndicates, secondary market, pass through securities, CMOs, MBS, CMBS You Are Here !!!

Schedule 4

Today Articles / News News and Updates Time Value Basics For Next Session Dynamic Terminals 5

Today 6

Homework… Bring your resume and post PDF to course discussion

Real Estate Club The BEST club at MTSU Open to ALL majors Learn things that apply to the rest of your life Make some awesome friends Hang out with creative, entrepreneurial dudes Limited space, act now, while supplies last! 8

Chapter 04: Fixed Interest Rate Mortgage Loans McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.

Mortgage Interest Rates Demand for mortgages is essentially derived demand; without a demand for real estate, the demand for mortgages would not exist. What will borrowers pay for the use of funds? What are lenders willing to accept for the use of funds? Mortgage Funds Supply Factors: Alternative Investments

Components of the Mortgage Interest Rate Real Rate of Interest – Time Preference for Consumption All things being equal, we would rather consume now. Interest is compensation to delay a purchase – Production Opportunities in the Economy Competition for funds when there are other investment opportunities Inflation Expectation – Directly impacts interest rates

Components of the Mortgage Interest Rate Default Risk Interest Rate Risk – Anticipated Inflation and Unanticipated Inflation Prepayment Risk Liquidity Risk Legislative Risk – Governments periodically change the “rules of the game”. As a lender, you take on the very real risk that the government may change the laws that permit you to collect on a legitimate debt after you have made the loan.

Components of the Mortgage Interest Rate r 1 = Real Rate p 1 = Risk Premiums f 1 = Inflation Rate

Mortgage Loan Terms Loan amount Loan maturity date Interest rate – Nominal vs. real Periodic payments – Effective annual rate of interest Constant Payment Mortgage (CPM)

Loan Amortization Patterns Type of CPM LoanPay RateLoan Balance at Maturity Fully Amortizing> Accrual rateFully repaid Partially Amortizing> Accrual rateNot fully repaid Interest Only= Accrual rate= Amount Borrowed Negative Amortizing< Accrual rate> Amount Borrowed Accrued Interest and Loan Payments – Accrual rate vs. pay rate

Mortgage Payment Patterns Example 4-1 Calculating the Payment for a CPM – $100,00 Mortgage – 7% Interest – 30 Years – Monthly Payments

Mortgage Payment Patterns = $100,000 = 30 x 12 = 360 = $0 = 7/12 = (or change P/Y to 12 and enter 7) = $ n i CPT FV PMT PV

Mortgage Payment Patterns Interest paid in the first month – (.07/12) x $100,000 = $ Principal paid in the first month – $ $ = $81.96 Every month, interest portion declines Every month, principal portion increases.

Exhibit 4-2 Monthly Payment, Principal, Interest, and Loan Balances for a Fully Amortizing, Constant Payment Mortgage

Exhibit 4-3 Relationship between Monthly Mortgage Payments and Maturity Periods: Fully Amortizing Loans

Computing a Loan Balance Essentially “removing” the interest that was built into the payment. Two mathematical methods – Compute the present value of the remaining payments. – Compute the future value of the amortized loan amount.

Computing a Loan Balance There are 3 methods to do this with a financial calculator – From Example 4-1, what is the future expected loan balance in 8 years?

Computing a Loan Balance Present Value Method = $ = 22 x 12 = 264 = $0 = 7/12 = = $89,491 n i CPT FV PMT PV

Computing a Loan Balance Future Value Method = $100,000 = 8 x 12 = 96 = $ = 7/12 = = $89,491 n i CPTFV PMT PV

Computing a Loan Balance Amortization Function Method Step 1: Compute Payment = $ Step 2: Press = P1 = 1 = P2 = 96 Balance = $89,491 ENTER AMORT ↓ ENTER ↓

Loan Closing Costs Additional Finance Charges – Loan Origination Fees Cover origination expenses – Loan Discount Fees – “Points” Used to raise the yield on the loan Borrower trade-off: points vs. contract rate 1 Point = 1% of the loan amount

Loan Closing Costs Why Points? – Sticky mortgage rates – It’s a way to price in the risk of a borrower. – Early repayment of a loan does not allow recovery of origination costs. It’s a way to cover the lender for the overhead of running its business. – Earn a profit on loans sold to investors at a yield equal to the loan interest rate.

Loan Fees & Borrowing Costs Calculating the effective interest cost Example 4-2: – $250,000 home – 80% LTV Loan – 8% Interest – 4 Points – 30 Years

Loan Fees & Borrowing Costs Step 1: Compute payment using the face value of the loan. = $200,000 = 360 = 8 = $ But, with points paid up front, the borrower actually receives less than the face value. n i PMT PV

Loan Fees & Borrowing Costs Step 2: Loan Amount = $200,000 - Points Paid = (.04 x $200,000) Amount Received = $192,000 Compute effective interest cost, using the Amount Received from Step 2 & Payment from Step 1.

Loan Fees & Borrowing Costs Compute effective interest cost: = $192,000= $ = 360= 8.44% PMTPV nCPTi

Loan Fees & Borrowing Costs What is the effective cost if we think this loan might be repaid after 8 years? – Step 1: Compute PMT = $ – Step 2: Compute Future Loan Balance P1 = 1 P2 = 96 Balance = $182, ENTER AMORT ↓ ENTER ↓

Loan Fees & Borrowing Costs – Step 3: Compute effective interest cost. = ($192,000) = $182, = $ = 96 = 8.72% n i CPT FV PMT PV

Truth-in-Lending Truth-in-Lending Act Annual Percentage Rate (“APR”)

Pricing FRMs By adjusting the fees that are charged, different effective rates of interest may be achieved.

Exhibit 4-8 Relationship between Mortgage Yield and Financing Fees at Various Repayment Dates