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Residential Financial Analysis: Borrowing and Prepayment Strategies

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  1. CHAPTER SIX RESIDENTIAL FINANCIAL ANALYSIS

  2. 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

  3. Incremental Borrowing Cost

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

  5. Early Repayment

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

  7. Origination Fees

  8. Calculator Solution • n= 25x12= 300 • PV= 8900 • PMT= $172.47 • FV= 0 • i= 1.9316 or $23.18 (annual)

  9. Loan Refinancing and Early Payment

  10. Loan Refinancing and Early Payment Continued

  11. Loan Refinancing and Early Payment Continued

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

  13. Early Loan Repayment: Lender Inducements

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

  15. Market Value of a Loan

  16. 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 Calculator Solution

  17. Effect of Below Market Financing

  18. Calculator Solution • n= 15x12= 180 • PV= $ 5000 • PMT= $ 85.63 • i= 1.6177% or 19.41 (annual)

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

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

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