1. 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

2. Incremental Borrowing Cost Loan AmtPayment ALT.II @ 13% $ 90,000$ 1015.05 ALT. I @ 12% 80,000 842.58 Difference$ 10,000$ 172.47

3. n= 25x12= 300 PV= 10,000 PMT= $172.47 FV= 0 i= 20.57% Incremental cost of borrowing weighted average= 12.95% Calculator Solution

4. Early Repayment Loan Amount Monthly Payment Loan Balance- after five years ALT.II @ 13% $ 90,000$ 1015.05$ 86,639.88 ALT.I @ 12% 80,000 842.58 76,522.56 Difference$ 10,000$ 172. 47$ 10,117.32

5. Calculator Solution n= 5x12 = 60 PV= 10,000 PMT= $172.47 FV= 10,117.32 i= 1.7360% or 20.83 (annual)

6. Origination Fees Net LoanMonthly Payment ALT.II @ 13%$ 87,300 ( 90,000) $ 1015.05 ALT.I @ 12% 78,400 (80,000) 842.58 Difference$ 8,900$ 172.47

7. Calculator Solution n= 25x12= 300 PV= 8900 PMT= $172.47 FV= 0 i= 1.9316 or $23.18

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

9. Loan Refinancing and Early Payment Continued Monthly payments, existing loan, ($80,000) (15%) (30 years) $ 1011.56 Monthly payments, new loan, ($78,976.50) (14%) (25 years) 950.69 Difference$ 60.87

10. 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

11. Calculator Solution n= 10x12= 120 PV= $ 4105 PMT= 60.87 FV= 889 i= 14.21

12. Early Loan Repayment: Lender Inducements Original loan, 15 years, 8% $ 75,000 Balance of loan, 10 years 35,348 Payments 716.74 Current Rate 12% Lender Inducement$ 2,000

13. Calculator Solution n= 5x12 = 60 PV= -33.348 PMT= $ 716.74 FV= 0 i= 10.50 Is this attractive to the borrower?

14. Market Value of a Loan Loan Amount$ 80,000 Interest Rate 10% Term (five years old) 20 years Payments$ 772.02

15. Calculator Solution Loan Balance: n= 15x12= 18 i= 10% /12=.8333 PMT= $ 772.02 FV= 0 PV= $ 71,842 Market Value Change i to 15% i= 15% /12 = 1.25 PV= $ 55,161

16. Effect of Below Market Financing Down Payment Payment Market rate loan $ 30,000$ 795.62 Loan Assumption 35,000 709.99 Difference$ 5,000$ 85.63

17. Calculator Solution n= 15x12= 180 PV= $ 5000 PMT= $ 85.63 i= 1.6177% or 19.41 (

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

19. 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) $ 1,289.53 Existing loan Difference 860.09 $ 429.44

20. Calculator Solution n= 15x12 = 180 PV= $ 30,000 PMT= $429.44 FV= 0 i= 15.46