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Real Estate Finance and Investments 14th edition William Brueggeman, Jeffrey Fisher - Solutions
What is meant by a sale-leaseback? Why would a building investor want to do a sale-leaseback of the land? What is the benefit to the party that purchases the land under a sale-leaseback?
What is meant by a participation loan? What does the lender participate in? Why would a lender want to make a participation loan? Why would an investor want to obtain a participation loan?
First Bank Company holds a note from Jason Black and a first mortgage on real estate owned by Jason Black to secure it. Mr. Black sold his property to Robert Frasca, and Robert Frasc assumed the mortgage. The bank did not give Mr. Black a release from his debt. Subsequently Mr. Frasca defaulted in
A builder is offering $100,000 loans for his properties at 9 percent for 25 years. Monthly payments are based on current market rates of 9.5 percent and are to be fully amortized over 25 years. The property would normally sell for $110,000 without any special financing.a. At what price should the
Assuming the borrower is in no danger of default, under what conditions might a lender be willing to accept a lesser amount from a borrower than the outstanding balance of a loan and still consider the loan paid in full?
An investor has owned a property for 15 years, the value of which is now to $200,000. The balance on the original mortgage is $100,000 and the monthly payments are $1,100 with 15 years remaining. He would like to obtain $50,000 in additional financing. A new first mortgage for $150,000 can be
Why might a wraparound lender provide a wraparound loan at a lower rate than a new first mortgage?
What is a buydown loan? What parties are usually involved in this kind of loan?
You have a choice between the following two identical properties: Property A is priced at $150,000 with 80 percent financing at a 10.5 percent interest rate for 20 years. Property B is priced at $160,000 with an assumable mortgage of $100,000 at 9 percent interest with 20 years remaining. Monthly
Why might a borrower be willing to pay a higher price for a home with an assumable loan?
Secondary Mortgage Purchasing Company (SMPC) wants to buy your mortgage from the local savings and loan. The original balance of your mortgage was $140,000 and was obtained 5 years ago with monthly payments at 10 percent interest. The loan was to be fully amortized over 30 years.a. What should SMPC
Why might the market value of a loan differ from its outstanding balance?
An investor obtained a fully amortizing mortgage 5 years ago for $95,000 at 11 percent for 30 years. Mortgage rates have dropped, so that a fully amortizing 25-year loan can be obtained at 10 percent. There is no prepayment penalty on the mortgage balance of the original loan, but three points will
An investor has $60,000 to invest in a $280,000 property. He can obtain either a $220,000 loan at 9.5 percent for 20 years or a $180,000 loan at 9 percent for 20 years and a second mortgage for $40,000 at 13 percent for 20 years. All loans require monthly payments and are fully amortizing.a. Which
What factors must be considered when deciding whether to refinance a loan after interest rates have declined?
A mortgage for $100,000 is made with initial payments of $500 per month for the first year. The interest rate is 9 percent. After the first year, payments will increase to an amount that makes the loan fully amortizable over the remaining 24 years with constant monthly payments.a. Calculate the
A borrower can obtain an 80 percent loan with an 8 percent interest rate and monthly payments. The loan is to be fully amortized over 25 years. Alternatively, he could obtain a 90 percent loan at an 8.5 percent rate with the same loan term. The borrower plans to own the property for the entire loan
What are the primary considerations that should be made when refinancing?
A $100,000 loan can be obtained at a 10 percent rate with monthly payments over a 15-year term.a. What is the after-tax effective interest rate on the loan, assuming the borrower is in a 30 percent tax bracket and the loan is held only three years? Assume that the benefit of interest deductions for
Suppose the index goes to 18 percent in year 5. What is the effective cost of the ARM? Does the payment cap keep the effective cost from rising?
Suppose the index goes to 18 percent in year 5. What is the effective cost of this ARM? What cap affected the rate in year 5?
If an ARM is priced with an initial interest rate of 8 percent and a margin of 2 percent (when the ARM index is also 8 percent at origination) and a fixed rate mortgage (FRM) with constant payment is available at 11 percent, what does this imply about inflation and the forward rates in the yield
A floating rate mortgage loan is made for $100,000 for a 30-year period at an initial rate of 12 percent interest. However, the borrower and lender have negotiated a monthly payment of $800.a. What will be the loan balance at the end of year 1?b. What if the interest rate increases to 13 percent at
MakeNu Mortgage Company is offering a new mortgage instrument called the Stable Mortgage. This mortgage is composed of both a fixed rate and an adjustable rate component. Mrs. Maria Perez is interested in financing a property, which costs $100,000, and is to be financed by Stable Home Mortgages
Distinguish between the initial rate of interest and expected yield on an ARM. What is the general relationship between the two? How do they generally reflect ARM terms?
Assume that a lender offers a 30-year, $150,000 adjustable rate mortgage (ARM) with the following terms:Initial interest rate = 7.5 percentIndex = 1-year TreasuriesPayments reset each yearMargin = 2 percentInterest rate cap = 1 percent annually; 3 percent lifetimeDiscount points = 2 percentFully
What are forward rates of interest? How are they determined? What do they have to do with indexes used to adjust ARM payments?
An ARM is made for $150,000 for 30 years with the following terms:Initial interest rate = 7 percentIndex = 1-year TreasuriesPayments reset each yearMargin = 2 percentInterest rate cap = NonePayment cap = 5 percent increase in any yearDiscount points = 2 percentFully amortizing; however, negative
A borrower has been analyzing different adjustable rate mortgage (ARM) alternatives for the purchase of a property. The borrower anticipates owning the property for five years. The lender first offers a $150,000, 30-year fully amortizing ARM with the following terms:Initial interest rate = 6
What is the difference between interest rate risk and default risk? How do combinations of terms in ARMs affect the allocation of risk between borrowers and lenders?
An interest only ARM is made for $200,000 for 30 years. The start rate is 5 percent and the borrower will (1) make monthly interest only payments for 3 years. Payments thereafter must be sufficient to fully amortize the loan at maturity.a. If the borrower makes interest only payments for 3 years,
List each of the main terms likely to be negotiated in an ARM. What does pricing an ARM using these terms mean?
An ARM for $100,000 is made at a time when the expected start rate is 5 percent. The loan will be made with a teaser rate of 2 percent for the first year, after which the rate will be reset. The loan is fully amortizing, has a maturity of 25 years, and payments will be made monthly.a. What will be
Why do adjustable rate mortgages (ARMs) seem to be a more suitable alternative for mortgage lending than PLAMs?
A 3/1 ARM is made for $150,000 at 7 percent with a 30-year maturity.a. Assuming that fixed payments are to be made monthly for three years and that the loan is fully amortizing, what will be the monthly payments? What will be the loan balance after three years?b. What would new payments be
How does the price level adjusted mortgage (PLAM) address the problem of uncertainty in inflationary expectations? What are some of the practical limitations in implementing a PLAM program?
A basic ARM is made for $200,000 at an initial interest rate of 6 percent for 30 years with an annual reset date. The borrower believes that the interest rate at the beginning of year (BOY) 2 will increase to 7 percent.a. Assuming that a fully amortizing loan is made, what will monthly payments be
How do inflationary expectations influence interest rates on mortgage loans?
A price level adjusted mortgage (PLAM) is made with the following terms:Amount = $95,000Initial interest rate = 4 percentTerm = 30 yearsPoints = 6 percentPayments to be reset at the beginning of each year.Assuming inflation is expected to increase at the rate of 6 percent per year for the next five
In the previous chapter, significant problems about the ability of borrowers to meet mortgage payments and the evolution of fixed interest rate mortgages with various payment patterns were discussed. Why didn’t this evolution address problems faced by lenders? What have lenders done in recent
Comprehensive Review Problem: A mortgage loan in the amount of $100,000 is made at 12 percent interest for 20 years. Payments are to be monthly in each part of this problem.a. What will monthly payments be if:(1) The loan is fully amortizing?(2) It is partially amortizing and a balloon payment of
A $50,000 interest only mortgage loan is made for 30 years at a nominal interest rate of 6 percent. Interest is to be accrued daily, but payments are to be made monthly.a. What will the monthly payments be on such a loan?b. What will the loan balance be at the end of 30 years?c. What is the
A fully amortizing CAM loan is made for $125,000 at 11 percent interest for 20 years.a. What will be the payments and balances for the first 6 months?b. What would payments be for a CPM loan?c. If both loans were repaid at the end of year 5, would the lender earn a higher rate of interest on either
A borrower and lender agree on a $200,000 loan at 10 percent interest. An amortization schedule of 25 years has been agreed on; however, the lender has the option to “call” the loan after 5 years. If called, how much will have to be paid by the borrower at the end of 5 years?
A reverse annuity mortgage is made with a balance not to exceed $300,000 on a property now valued at $700,000. The loan calls for monthly payments to be made to the borrower for 120 months at an interest rate of 11 percent.a. What will the monthly payments be?b. What will be the RAM balance at the
A borrower is faced with choosing between two loans. Loan A is available for $75,000 at 6 percent interest for 30 years, with 6 points to be included in closing costs. Loan B would be made for the same amount, but for 7 percent interest for 30 years, with 2 points to be included in the closing
A lender is considering what terms to allow on a loan. Current market terms are 8 percent interest for 25 years for a fully amortizing loan. The borrower, Rich, has requested a loan of $100,000. The lender believes that extra credit analysis and careful loan control will have to be exercised
What is partial amortization?
John wants to buy a property for $105,000 and wants an 80 percent loan for $84,000. A lender indicates that a fully amortizing loan can be obtained for 30 years (360 months) at 8 percent interest; however, a loan origination fee of $3,500 will also be necessary for John to obtain the loan.a. How
What is negative amortization?
A loan for $50,000 is made for 10 years at 8 percent interest and no monthly payments are scheduled.a. How much will be due at the end of 10 years?b. What will be the yield to the lender if it is repaid after 8 years? (Assume monthly compounding.)c. If 1 point is charged in (b) what will be the
A mortgage loan is made to Mr. Jones for $30,000 at 10 percent interest for 20 years. If Mr. Jones has a choice between a CPM and a CAM, which one would result in his paying a greater amount of total interest over the life of the mortgage? Would one of these mortgages be likely to have a higher
A partially amortizing loan for $90,000 for 10 years is made at 6 percent interest. The lender and borrower agree that payments will be monthly and that a balance of $20,000 will remain and be repaid at the end of year 10. Assuming 2 points are charged by the lender, what will be the yield if the
An expected inflation premium is said to be part of the interest rate, what does this mean?
An “interest only” mortgage is made for $80,000 at 10 percent interest for 10 years. The lender and borrower agree that monthly payments will be constant and will require no loan amortization.a. What will the monthly payments be?b. What will be the loan balance after 5 years?c. If the loan is
What is the accrual rate and payment rate on a mortgage loan?
A partially amortizing mortgage is made for $60,000 for a term of 10 years. The borrower and lender agree that a balance of $20,000 will remain and be repaid as a lump sum at that time.a. If the interest rate is 7 percent, what must monthly payments be over the 10-year period?b. If the borrower
A fully amortizing mortgage is made for $80,000 for 25 years. Total monthly payments will be $900 per month. What is the interest rate on the loan?
What is meant by the “nominal rate” on a mortgage loan?
What is the effective borrowing cost (rate)?
A fully amortizing mortgage is made for $100,000 at 6.5 percent interest. If the monthly payments are $1,000 per month, when will the loan be repaid?
What is the connection between the Truth-in-Lending Act and the annual percentage rate (APR)?
A 30-year fully amortizing mortgage loan was made 10 years ago for $75,000 at 6 percent interest. The borrower would like to prepay the mortgage balance by $10,000.a. Assuming he can reduce his monthly mortgage payments, what is the new mortgage payment?b. Assuming the loan maturity is shortened
Why do lenders charge origination fees, especially loan discount fees?
Mr. Qualify is applying for a $100,000 GPM loan for 25 years at an interest rate of 9 percent. Payments would be designed so as to graduate at the rate of 7.5 percent for three years beginning with payments in the second year.a. What would monthly payments be for Mr. Qualify in each of the first
What are loan closing costs? How can they be categorized? Which of the categories influence borrowing costs and why?
A property is purchased for $70,000. The purchase is financed with a GPM carrying a 12 percent interest rate. A 7.5 percent rate of graduation will be applied to monthly payments beginning each year after the loan is originated for a period of five years. The initial loan amount is $63,000 for a
A fully amortizing mortgage loan is made for $100,000 at 6 percent interest for 30 years. Determine payments for each of the periods a–d below if interest is accured:a. Monthly.b. Quarterly.c. Annually.d. Weekly.
Why do the monthly payments in the beginning months of a CPM loan contain a higher proportion of interest than principal repayment?
As inflation increases, the impact of the tilt effect is said to become even more burdensome on borrowers. Why is this so?
A fully amortizing mortgage loan is made for $80,000 at 6 percent interest for 25 years. Payments are to be made monthly. Calculate:a. Monthly payments.b. Interest and principal payments during month 1.c. Total principal and total interest paid over 25 years.d. The outstanding loan balance if the
Define amortization. List the five types discussed in this chapter.
Why do monthly mortgage payments increase so sharply during periods of inflation? What does the tilt effect have to do with this?
A borrower obtains a fully amortizing CPM loan for $125,000 at 11 percent interest for 10 years. What will be the monthly payment on the loan? If this loan had a maturity of 30 years, what would be the monthly payment?
What are the major differences between the four CPM loans discussed in this chapter? What are the advantages to borrowers and risks to lenders for each? What elements do each of the loans have in common?
A loan of $60,000 is due 10 years from today. The borrower wants to make annual payments at the end of each year into a sinking fund that will earn compound interest at an annual rate of 10 percent. What will the annual payments have to be? Suppose that the monthly payments earn 10 percent
A pension fund is making an investment of $100,000 today and expects to receive $1,600 at the end of each month for the next five years. At the end of the fifth year, the capital investment of $100,000 will be returned. What is the internal rate of return compounded annually on this investment?
A corporation is considering the purchase of an interest in a real estate syndication at a price of $75,000. In return, the syndication promises to pay $1,000 at the end of each month for the next 25 years (300 months). If purchased, what is the expected internal rate of return, compounded monthly?
The Dallas Development Corporation is considering the purchase of an apartment project for $100,000. They estimate that they will receive $15,000 at the end of each year for the next 10 years. At the end of the 10th year, the apartment project will be worth nothing. If Dallas purchases the project,
What is an internal rate of return? How is it used? How does it relate to the concept of compound interest?
John is considering the purchase of a lot. He can buy the lot today and expects the price to rise to $15,000 at the end of 10 years. He believes that he should earn an investment yield of 8 percent compounded annually on his investment. The asking price for the lot is $7,000. Should he buy it? What
What is the sinking-fund factor? How and why is it used?
Walt is evaluating an investment that will provide the following returns at the end of each of the following years: year 1, $12,500; year 2, $10,000; year 3, $7,500; year 4, $5,000; year 5, $2,500; year 6, $0; and year 7, $12,500. Walt believes that he should earn 12 percent compounded annually on
Would you prefer making a $25,000 investment that will earn interest at the rate of 6 percent compounded monthly or making the same $25,000 investment at 7 percent compounded annually?
Jim makes a deposit of $12,000 in a bank account. The deposit is to earn interest compounded annually at the rate of 6 percent for seven years.a. How much will Jim have on deposit at the end of seven years?b. Assuming the deposit earned a 9 percent rate of interest compounded quarterly, how much
What is meant by mortgage foreclosure, and what alternatives are there to such action?
How must one discount a series of uneven receipts to find PV?
What is an annuity? How is it defined? What is the difference between an ordinary annuity and an annuity due?
An investor is considering an investment that will pay $2,150 at the end of each year for the next 10 years. He expects to earn a return of 12 percent on his investment, compounded annually. How much should he pay today for the investment? How much should he pay if the investment returns are
Suppose you have the opportunity to make an investment in a real estate venture that expects to pay investors $750 at the end of each month for the next eight years. You believe that a reasonable return on your investment should be an annual rate of 15 percent compounded monthly.a. How much should
How does discounting, as used in determining present value, relate to compounding, as used in determining future value? How would present value ever be used?
Suppose you deposit $2,500 at the end of year 1, nothing at the end of year 2, $750 at the end of year 3, and $1,300 at the end of year 4. Assuming that these amounts will be compounded at an annual rate of 15 percent, how much will you have on deposit at the end of five years?
Suppose you deposit $1,250 at the end of each quarter in an account that will earn interest at an annual rate of 10 percent compounded quarterly. How much will you have at the end of four years?
What general rule can be developed concerning maximum values and compounding intervals within a year? What is an equivalent annual yield?
Jones can deposit $5,000 at the end of each six-month period for the next 12 years and earn interest at an annual rate of 8 percent, compounded semiannually. What will the value of the investment be after 12 years? If the deposits were made at the beginning of each period, what would the value of
What is the essential concept in understanding compound interest?
What is a deficiency judgment and how is its value to a lender affected by the Bankruptcy Code?
What are the risks to the lender if a borrower declares bankruptcy?
Is a foreclosure sale sometimes desirable or even necessary when the mortgagor is willing to give a voluntary deed?
What special advantages does a mortgagee have in bidding at the foreclosure sale where the mortgagee is the foreclosing party? How much will the mortgagee normally bid at the sale?
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