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Residential Financial Analysis: Borrowing and Prepayment Strategies

Learn to calculate borrowing costs, prepayment penalties, market values, and effects of refinancing in residential real estate. Evaluate loan origination fees, below market financing impact, and early repayment implications.

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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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