1 / 27

Chapter 4

Chapter 4. History of Real Estate Finance and the Fixed-Rate Mortgage. 4-1. Chapter 4 Learning Objectives. Understand how residential lending evolved from the earliest of times through World War II Understand the mechanics of the standard fixed-rate mortgage. 4-2.

kylynn-duran
Download Presentation

Chapter 4

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chapter4 History of Real Estate Finance and the Fixed-Rate Mortgage

  2. 4-1 Chapter 4Learning Objectives • Understand how residential lending evolved from the earliest of times through World War II • Understand the mechanics of the standard fixed-rate mortgage

  3. 4-2 History Of Real Estate Finance • ROMAN LAW • Transfer Of Title And Possession Until Repayment • No Transfer Of Title Or Possession. Lender Could Take Title And Possession Under Suspicion Of Default • No Transfer Of Title Or Possession. Lender Could Take Title Under Actual Default

  4. 4-3 History Of Real Estate Finance Con’t • GERMAN LAW • Gage Is A Deposit Made To Fulfill An Agreement • Mort Is French For Dead. Real Property (Not Transportable) Was A Dead Gage • In Default The Lender Could Take Title But Could Not Look Further For Relief

  5. 4-4 History Of Real Estate Finance Con't • ENGLISH LAW • Concept Of Usury In That Charging Interest Was Sinful • Equitable Right Of Redemption Allowing Borrower To Redeem The Property After Default

  6. 4-5 History Of Real Estate Finance Con’t • U.S. Law Is A Mix Of Roman, German, And English Law • EARLY EXPANSION • Little Need For Lending • Some Building Societies Formed To Consolidate Funds For Home Buying • POST-CIVIL WAR • Increased Mortgage Lending To Finance Westward Expansion • Typical Loan Was Short-term, Interest Only

  7. 4-6 History Of Real Estate Finance Con’t • 1920s BOOM • S&Ls Expanded Rapidly • Real Estate Prices Rose Rapidly • 1930s DEPRESSION • Banking System Collapsed, Money Supply Plummeted • Short-term, Non-Amortizing Loans Became A Problem • A Number Of Federal Agencies Created Including FSLIC, FHA, And Fannie Mae

  8. 4-7 Fixed-rate Mortgages • PRESENT VALUE OF AN ANNUITY • PVANN = (1+i)n – 1 (i) (1+i)n • MORTGAGE CONSTANT • MCi = (i) (1+i)n (1+i)n - 1

  9. 4-8 Fixed-rate Mortgages • IMPORTANT VARIABLES • Amount Borrowed • Contract Interest Rate • Maturity (Term) • Outstanding Balance • Amortization • Payment • Financing Costs Including Discount Points • Annual Percentage Rate (APR)

  10. 4-8 Fixed-rate Mortgages • Suppose You Borrow $100,000 @ 7.50% For 30 Years, Monthly Payments • What Is Your Monthly Payment To Fully Amortize The Loan Over Its Term?

  11. 4-9 Fixed-rate Mortgages • PMT = AMT. BORROWED (MCi,n) • PMT = $100,000 (MC7.5,30) • PMT = $100,000 x • (.075/12) (1+.075/12)360 (1+.075/12)360 – 1 = $100,000 (.0069921) = $699.21

  12. 4-10 Fixed-rate Mortgages • LOAN AMORTIZATION • Payment Consists Of Interest And Repayment Of Principal • AMORTIZATION FOR MONTH ONE • Payment Is $699.21 • Interest Portion Is $100,000 (.075/12) = $625 • Repayment Of Principal Portion Is Remainder, $699.21 - 625 = $74.21 • Each Month’s Interest Is Calculated As The Loan Balance At The Beginning Of The Month Times The Monthly Interest Rate

  13. 4-11 Fixed-rate Mortgages • OUTSTANDING BALANCE • Present Value Of The Remaining Stream Of Payments Discounted At The Contract Rate • FOR OUR EXAMPLE AT THE EOY 5: • Enter The Payment (699.21) • Enter The Contract Rate (.075/12) • Enter The Number Of Remaining Payments (300) • Solve For Present Value (PV) ($94,617)

  14. 4-12 Fixed-rate Mortgages • KEYSTROKES FOR PAYMENT CALCULATION • Enter Amount Borrowed As Negative PV • Enter The Contract Rate (Adjusted Monthly) • Enter The Number Of Payments • Solve For Payment (PMT) • Caution: If Your Calculator Is Set On One Payment Per Year, You Must Divide The Interest Rate By 12 And Multiply The Years By 12.

  15. 4-13 Fixed-rate Mortgages • APR • The Effective Cost Of The Loan Assuming It Is Held For Its Full Term • Some Items Included In APR Calculation: • Origination Fee, Lender Inspection Fee, Assumption Fee, Underwriting Fee, Tax Service Fee, Document Prep Fee, Prepaid Interest, Mortgage Insurance Premium, Discount Points

  16. 4-14 Fixed-rate Mortgages

  17. 4-15 Fixed-rate Mortgages

  18. Contract Rate 7% 6.75% 6.50% 6.25% Discount Points 0 1.00 2.875 3.00 Trade Off Between Contract Rate and Discount Points 4-16

  19. 4-17 Calculating The APR • Assumption: Borrow $100,000 for 30 years, monthly payments • 7% & O pts: • 100,000 - 0 = $665.30 (PVAFi/12,360) i =7% • 6.75% & 1 pt: • 100,000 - 1,000 = $648.60 (PVAFi/12,360) • i = 6.85%

  20. 4-18 Calculating The APR Cont. • 6.50% & 2.875 pts: • 100,000-2,875= $632.07 (PVAFi/12,360) i = 6.78% • 6.25% & 3 pts: • 100,000-3,000= $615.72(PVAFi/12,360) i = 6.54%

  21. 4-19 Calculating the Effective Cost Under Shortened Holding Period • Assumption: Borrow $100,000 for 30 years, monthly payments, hold for five years • 7% & 0 pts: $100,000 - 0 = • $665.30 (PVAFi/12,60) + $94,132 (PVFi/12,60) • i = 7% • 6.75% & 1 pt: $100,000 - $1,000 = • $648.60 (PVAFi/12,60) + $93,876 (PVFi/12,60) • i = 6.99%

  22. 4-20 Calculating the Effective Cost Under Shortened Holding Period • 6.50% & 2.875 pts: $100,000 - 2,875 = • $632.07(PVAFi/12,60) + $93,611(PVFi/12,60) • i = 7.2% • 6.25% & 3 pts: $100,000 - $3,000 = $615.72(PVAFi/12,60) + $93,337(PVFi/12,60) • i = 6.98%

  23. 4-21 Summary of Effective Costs • Option APR 5 Years • 7% & 0 pts 7% 7% • 6.75% & 1 pt 6.85% 6.99% • 6.50% &2.875 pts 6.78% 7.21% • 6.25% & 3 pts 6.54% 6.98%

  24. 4-22 Prepayment Penalty • Assumptions: $100,000 at 7.5% for 30 years, monthly payments. Five percent prepayment penalty over entire term. Repay at the end of year 5 • PMT = $699.21 • BalanceEOY5 =94,617 • Effective cost with no points • $100,000 - 0 = $699.21(PVAFi/12,60)+$94,617(1.05)(PVFi/12,60) • i = 8.28%

  25. 4-23 Fifteen Year Mortgage • Borrow $100,000 at 7.50% for 15 years, monthly payments • PMT15 =$100,000( MC7.5,15) = $927.01 • PMT30 = $100,000 (MC7.5,30) = $699.21 • Total interest over 15 year term • $927.01(180) - $100,000 = $66,862 • Total interest over 30 year term • $699.21(360) - $100,000=$151,716 • Difference in Interest Paid • $151,716 - $66,862 = $84,854

  26. 4-24 Extra Payment Monthly • PMT= $100,000 (MC7.5,30) = $699.21 • $699.21/12= $58.27 Extra Paid Monthly • New PMT= $699.21 + $58.27 = $757.48 • Number of Payments at New Payment Amount • $100,000 = $757.48 (PVAF7.5/12, n) • n= 279.84, approximately 23 years • Amount Saved • $699.21 ( 80.16) - $58.27 (279.84) • $56,049 - $16,306 = $39, 743

  27. 4-25 Extra Payment-Lump Sum • PMT= $100,000 ( MC7.5,30) = $699.21 • $10,000 Extra Paid at the end of year 3 • BALEOY3 : $97,014 • Minus Extra Payment: $10,000 • New BalanceEOY3 : $87,014 • Number of Payments Remaining After Extra Payment • $87,014= $699.21 ( PVAF7.5/12, n) • n= 241.41 • Amount Saved: • $699.21 (82.59) - $10,000= $47,748

More Related