assignment 12 Mortgage analysis in Real state practice Flashcards
Robert is selling his home to his good friend, Lisa. Robert is selling his waterfront multi-storey home for $3,950,000, and he will take back a mortgage for $2,000,000 at a contract rate of j2 = 4.5%, with a 25-year amortization period, a 3-year term, and monthly payments rounded up to the next higher $10.
Calculate the required monthly payment for this loan.
- $12,210
- $9,240
- $11,070
- $10,270
correct Answer: 3
Option (3) is correct because the required monthly payment is $11,070, rounded up to the next higher $10.
PRESS
DISPLAY
4.5 ⬛ NOM%
4.5
2 ⬛ P/YR
2
⬛ EFF%
4.550625
12 ⬛ P/YR
12
⬛ NOM%
4.458383
2000000 PV
2,000,000
12 × 25 = N
300
0 FV
0
PMT
–11,069.459086
Robert is selling his home to his good friend, Lisa. Robert is selling his waterfront multi-storey home for $3,950,000, and he will take back a mortgage for $2,000,000 at a contract rate of j2 = 4.5%, with a 25-year amortization period, a 3-year term, and monthly payments rounded up to the next higher $10.
How much will Lisa owe Robert at the end of the 3-year term? Round your final answer to the nearest dollar.
- $1,877,258
- $1,586,476
- $1,860,095
- $1,203,363
Correct Answer: 3
Option (3) is correct because $1,860,095 is owed at the end of the 3-year term. Continuing the calculations from the previous question, the outstanding balance at the end of the 36-month term is calculated as follows:
PRESS
DISPLAY
11070 +/– PMT
–11,070
36 INPUT ⬛ AMORT
PER 36-36
= = =
1,860,094.58675
Robert is selling his home to his good friend, Lisa. Robert is selling his waterfront multi-storey home for $3,950,000, and he will take back a mortgage for $2,000,000 at a contract rate of j2 = 4.5%, with a 25-year amortization period, a 3-year term, and monthly payments rounded up to the next higher $10.
Lisa is considering another possible mortgage, arranged through a mortgage broker. It will also have a face value of $2,000,000 with a contract rate of j2 = 5.5%, 25-year amortization period, 3-year term, and monthly payments rounded up to the next higher $10. However, the mortgage broker will take a brokerage fee of 3% of the loan’s face value, which will be deducted from the face value of the loan. What effective annual interest rate will Lisa be paying on the funds advanced, rounded to two decimal places?
- 7.47%
- 8.50%
- 9.02%
- 6.78%
Correct Answer: 4
Option (4) is correct because Lisa will pay an effective annual interest rate of 6.78%. First, the face value of the loan is used to calculate the monthly payments. Then, the fees can be subtracted from the face value to calculate the rate paid on the funds advanced. The brokerage fee is $60,000 ($2,000,000 × 3%); therefore, the net amount advanced is $1,940,000 ($2,000,000 – $60,000).
PRESS
DISPLAY
5.5 ⬛ NOM%
5.5
2 ⬛ P/YR
2
⬛ EFF%
5.575625
12 ⬛ P/YR
12
⬛ NOM%
5.438018
2000000 PV
2,000,000
12 × 25 = N
300
0 FV
0
PMT
–12,207.829653
12210 +/– PMT
–12,210
36 INPUT ⬛ AMORT
PER 36-36
= = =
1,877,258.41694
1877258.42 +/– FV
–1,877,258.42
36 N
36
1940000 PV
1,940,000
I/YR
6.574422
⬛ EFF%
6.77619
Robert is selling his home to his good friend, Lisa. Robert is selling his waterfront multi-storey home for $3,950,000, and he will take back a mortgage for $2,000,000 at a contract rate of j2 = 4.5%, with a 25-year amortization period, a 3-year term, and monthly payments rounded up to the next higher $10.
Assume that Lisa makes monthly payments of $12,000 and has an outstanding balance after 3 years (OSB36) of $1,885,450. If the market rate for similar mortgages is j2 = 6.5% and Lisa has made a down payment of $1,950,000, what is the market value of the offer, rounded to the nearest dollar?
- $1,141,387
- $3,933,923
- $2,742,373
- $3,898,265
Correct Answer: 4
Option (4) is correct because the market value of the offer is $3,898,265, rounded. The payments of $12,000 and the outstanding balance of $1,885,450 can be discounted at the current rate of j2 = 6.5% to find the market value of the mortgage. The down payment is added to this number to determine the market value of the offer.
PRESS
DISPLAY
6.5 ⬛ NOM%
6.5
2 ⬛ P/YR
2
⬛ EFF%
6.605625
12 ⬛ P/YR
12
⬛ NOM%
6.413688
12000 +/– PMT
–12,000
1885450 +/– FV
–1,885,450
36 N
36
PV
1,948,265.30965
+ 1950000 =
3,898,265.30965
Which one of the following statements regarding fees is TRUE?
- When a fee is deducted from a loan advance, it is referred to as a bonus.
- A lender bonus is a fee charged by lenders as a means of increasing their yield on a loan.
- When a fee is added to the face value of a loan, it is referred to as a discount.
- A brokerage fee is charged by borrowers to mortgage brokers for the brokerage’s services in arranging a mortgage loan.
Correct Answer: 2
Option (2) is correct because a lender bonus may be charged by lenders to borrowers as a means of increasing their yield on a loan. Option (1) is incorrect because when a fee is deducted from a loan advance, it is referred to as a discount. Option (3) is incorrect because when a fee is added to the face value of a loan, it is referred to as a bonus. Option (4) is incorrect because a brokerage fee is charged by mortgage brokers not borrowers for the mortgage broker’s involvement in arranging a mortgage loan.
In a closed mortgage with a term under five years, there is no legal obligation on the part of the lender to allow full repayment during the loan term. However, lenders typically allow prepayment of the remaining outstanding balance but charge which of the following?
- A penalty of six months’ interest on the amount to be prepaid
- A penalty of the lesser of three months’ interest or the interest prepayment penalty (IPP) on the amount to be prepaid
- A penalty of the greater of six months’ interest or the interest prepayment penalty (IPP) on the amount to be prepaid
- A penalty of the greater of three months’ interest or the interest rate differential (IRD) on the amount to be prepaid
Correct Answer: 4
Option (4) is correct because in a closed mortgage with a term under five years, although there is no legal obligation to do so, lenders typically allow prepayment of the remaining outstanding balance, but with a penalty of the greater of three months’ interest or the interest rate differential (IRD) on the amount to be prepaid.
Which one of the following statements regarding portable mortgages is FALSE?
- The borrower can transfer the terms, conditions, and interest rate of the current mortgage to the home the borrower would like to purchase.
- if the current mortgage is too large for the new home, lenders will never allow the borrower to pay down a portion of the original balance without penalty.
- If the current mortgage is not large enough to cover the purchase of the new home, then the lender will often increase the mortgage and extend the borrower’s loan term, providing the borrower’s income and new property meet the lender’s criteria.
- If the current posted rate for the new term is lower than the existing mortgage contract rate, the lender will typically blend the interest rates and the result will be a lower interest rate for the borrower.
Correct Answer: 2
Option (2) is correct because if the current mortgage is too large for the new home, many institutions allow the borrower to pay down a portion (for example, 10%) of the original loan balance without penalty. If there was any remaining excess balance, it would be subject to a prepayment charge.
A property owner wants to sell a house and has it listed for $450,000. However, due to the dire condition of the real estate market, the property owner is having trouble selling that property. The owner decides to offer more advantageous financing options. Therefore, with a $400,000 mortgage, the market interest rate is j12 = 3.5% with monthly payments over a 20-year amortization period. However, the property owner (vendor) will accept lower payments of $1,800 per month instead of the contract payment. What is the market value of the mortgage, rounded to the nearest dollar?
- $310,366
- $299,627
- $242,373
- $241,388
Correct Answer: 1
Option (1) is correct because the market value of the mortgage is $310,366. First, calculate the payment at the market rate and then determine the payment difference if the borrower makes payments of $1,800 per month.
PRESS
DISPLAY
400000 PV
400,000
3.5 I/YR
3.5
12 ⬛ P/YR
12
20 × 12 = N
240
0 FV
0
PMT
–2,319.838872
+/- –1800
–1,800
=
519.838872
The market payment is $2,319.84 per month. However, if the borrower only pays $1,800 per month, the financial benefit to the borrower is the payment difference of $519.84 per month ($2,319.84 – $1,800). To determine the market value of this arrangement, find the present value of the payment difference at the market rate over the amortization period. The calculator steps continue as follows:
PRESS
DISPLAY
519.84 +/- PMT
–519.84
PV
89,633.811432
This present value represents the financial benefit the borrower would receive. Therefore, the market value of the mortgage equals the mortgage amount of $400,000 less the financial benefit of $89,634. The market value of the mortgage is $310,366 ($400,000 – $89,634).
According to the Business Practices and Consumer Protection Act (BPCPA), which of the following statements about annual percentage rate (APR) disclosure is TRUE?
- The BPCPA requires that mortgage brokers and lenders disclose the APR to individuals borrowing for family, household, or personal purposes.
- The only measure of the trust cost of the borrowing is the BPCPA’s APR disclosure requirement.
- The BPCPA’s APR is equal to the contractual interest rate plus interest finance charges.
- The BPCPA requires that certain mortgage contracts specify the interest rate as compounded annually or semi-annually.
Correct Answer: 1
Option (1) is correct. The BPCPA requires that disclosure be given by mortgage brokers and lenders to individuals who borrow primarily for personal, family, or household purposes. Option (2) is incorrect because another measure of the true cost of borrowing is the cost of funds advanced to the borrower. Option (3) is incorrect because the BPCPA’s APR is equal to the contractual interest rate plus non-interest finance charges. Option (4) is incorrect because the Interest Act requires that certain mortgage contracts specify the interest rate as compounded annually or semi-annually.
Which one of the following is NOT a potential advantage to a mortgage loan assumption?
- May allow the vendor to avoid prohibitive prepayment penalties if the alternative is to pay off the loan prior to maturity
- May facilitate a sale to a purchaser who cannot obtain conventional financing
- Helps reduce market interest rates by freeing up additional money for institutional lenders to lend out
- May help avoid fees, such as legal, appraisal, or insurance, that would be required in originating a new loan
Correct Answer: 3
Option (3) is correct because it is not a potential advantage that may arise as a result of a mortgage loan assumption because a mortgage assumption does not affect the amount of money that institutional lenders have available to lend out. In other words, there is no effect on the supply of money available for lending, which means there is no corresponding change to the market interest rate.
A borrower must decide between the following two mortgage loans:
Alternative A
Alternative B
Face Value
$410,000
$405,000
Contract Rate (j2)
4.5%
4%
Amortization Period
20 years
25 years
Term
3 years
3 years
Bonuses and Fees
$7,500
$3,100
Net Proceeds
$402,500
$401,900
Payments
Monthly
Monthly
Calculate the cost of funds advanced under Alternative A, expressed as an effective annual rate. Round your final answer to two decimal places.
- 4.50%
- 4.97%
- 5.27%
- 3.11%
Correct Answer: 3
Option (3) is correct because the cost of funds advanced expressed as an effective annual rate is 5.27%, rounded. To calculate the cost of funds advanced, first calculate the payment and the outstanding balance. Then enter the net proceeds and change N to the length of the term. Solve for the j12 and j1 rates.
PRESS
DISPLAY
4.5 ⬛ NOM%
4.5
2 ⬛ P/YR
2
⬛ EFF%
4.550625
12 ⬛ P/YR
12
⬛ NOM%
4.458383
20 × 12 = N
240
410000 PV
410,000
0 FV
0
PMT
–2,584.661138
2584.66 +/– PMT
–2,584.66
36 INPUT ⬛ AMORT
PER 36‑36
= = =
369,198.147664
369198.15 +/– FV
–369,198.15
36 N
36
402500 PV
402,500
I/YR
5.149547
⬛ EFF%
5.272843
A borrower must decide between the following two mortgage loans:
Alternative A
Alternative B
Face Value
$410,000
$405,000
Contract Rate (j2)
4.5%
4%
Amortization Period
20 years
25 years
Term
3 years
3 years
Bonuses and Fees
$7,500
$3,100
Net Proceeds
$402,500
$401,900
Payments
Monthly
Monthly
Calculate the cost of funds advanced under Alternative B, expressed as an effective annual rate. Round your final answer to two decimal places.
- 4.00%
- 5.15%
- 4.99%
- 4.33%
Correct Answer: 4
Option (4) is correct because the cost of funds advanced expressed as an effective annual rate is 4.33%, rounded. To calculate the cost of funds advanced, first calculate the payment and the outstanding balance. Then enter the net proceeds and change N to the length of the term. Solve for the j12 and j1 rates.
PRESS
DISPLAY
4 ⬛ NOM%
4
2 ⬛ P/YR
2
⬛ EFF%
4.04
12 ⬛ P/YR
12
⬛ NOM%
3.967068
25 × 12 = N
300
405000 PV
405,000
0 FV
0
PMT
–2,130.381831
2130.38 +/– PMT
–2,130.38
36 INPUT ⬛ AMORT
PER 36‑36
= = =
374,794.263917
374794.26 +/– FV
–374,794.26
36 N
36
401900 PV
401,900
I/YR
4.249064
⬛ EFF%
4.332798
The nuclear power plant has permanently shut down in Carlington, Ontario, and Marsha needs to sell her house to get a job in Toronto. However, she has had her house on the market for eight months now, and while there has been some interest, the deals always fall through due to loan qualification. With half of the town unemployed, it is difficult for many buyers to qualify for conventional financing. Marsha has had requests to offer vendor financing, but she turned them down because she considers them too risky. She is now reconsidering but wants to ensure she earns a rate of interest that will adequately compensate her for the risk she will be undertaking.
She has received an offer to purchase for a $25,000 cash down payment plus vendor financing for $200,000. The partially amortized mortgage loan will have an interest rate of j2 = 6.25% (the market rate), a 25-year amortization, a 3-year term, and monthly payments. Marsha is considering a counter-offer with all the same terms, except increasing the interest rate to j2 = 11.75%. What is the market value of this counter offer? Hint: this is an example of vendor financing at an above-market interest rate, to reflect the higher risk involved in this situation. Round your final answer to the nearest dollar.
- $296,468
- $328,468
- $253,654
- $239,863
Correct Answer: 3
Option (3) is correct because the market value of offer is $253,654. First, calculate the monthly payments and the outstanding balance after the 36th payment, using the original interest rate of j2 = 11.75%.
PRESS
DISPLAY
11.75 ⬛ NOM%
11.75
2 ⬛ P/YR
2
⬛ EFF%
12.095156
12 ⬛ P/YR
12
⬛ NOM%
11.472285
200000 PV
200,000
25 × 12 = N
300
0 FV
0
PMT
–2,028.88619
2028.89 +/– PMT
–2,028.89
36 INPUT ⬛ AMORT
PER 36-36
= = =
195,007.285059
Then calculate the market value of the mortgage using the market interest rate of j2 = 6.25%. The calculator steps continue as follows:
PRESS
DISPLAY
6.25 ⬛ NOM%
6.25
2 ⬛ P/YR
2
⬛ EFF%
6.347656
12 ⬛ P/YR
12
⬛ NOM%
6.17014
195007.29 +/– FV
–195,007.29
3 × 12 = N
36
PV
228,654.352372
The market value of the offer is:
Market Value of Mortgage
$228,654
+
Cash Down Payment
+
25,000
Market Value of Offer
$253,654
Donald bought his house 3 years ago, at which time he arranged a $395,000 mortgage. This loan was written at a rate of 2.75% per annum, compounded semi-annually, with a 4-year term and 30-year amortization period. The loan has monthly payments of $1,610 and the outstanding balance due at the end of the 4-year term will be $359,032.96.
Today, 36 months into this loan, Donald has received an offer from Tina to buy his house for $55,000 cash, plus assumption of the existing mortgage on the property. If current mortgage rates for 1-year terms are 4.25% per annum, compounded semi-annually, calculate the market value of Tina’s offer, rounded to the nearest dollar.
- $418,133
- $426,494
- $398,125
- $433,386
Correct Answer: 1
Option (1) is correct because the market value of offer is $418,133. The original monthly payments and outstanding balance after the 48th payment are given. As such, determine the market value of the assumed loan using the current mortgage interest rate of j2 = 4.25% for 1-year terms (the remaining time left in the term).
PRESS
DISPLAY
4.25 ⬛ NOM%
4.25
2 ⬛ P/YR
2
⬛ EFF%
4.295156
12 ⬛ P/YR
12
⬛ NOM%
4.212851
1610 +/- PMT
–1,610
359032.96 +/– FV
–359,032.96
12 N
12
PV
363,133.266985
Cash Down Payment
$55,000
+
Market Value of Assumed Loan
+363,133
Market Value of Offer
$418,133
A potential purchaser finds an attractive home listed for sale at $600,000 and submits an offer consisting of an $80,000 cash down payment subject to the vendor taking back a $520,000 mortgage at 3.99% per annum, compounded semi-annually. This loan will have a 20-year amortization, a 5-year term, and monthly payments. If 5-year term mortgages are currently being offered at 5.99% per annum, compounded semi-annually, calculate the market value of the offer, rounded to the nearest dollar.
- $574,038
- $559,593
- $651,897
- $602,188
Correct Answer: 2
Option (2) is correct because the market value of the offer is $559,593, rounded. First, calculate the monthly payments and outstanding balance after the 60th payment, using the original interest rate of j2 = 3.99%.
PRESS
DISPLAY
3.99 ⬛ NOM%
3.99
2 ⬛ P/YR
2
⬛ EFF%
4.0298
12 ⬛ P/YR
12
⬛ NOM%
3.957232
520000 PV
520,000
20 × 12 = N
240
0 FV
0
PMT
–3,139.391387
3139.39 +/–PMT
–3,139.39
60 INPUT ⬛ AMORT
PER 60-60
= = =
425,653.416791
Then calculate the market value of the mortgage using the market interest rate of j2 = 5.99%. The calculator steps continue as follows:
PRESS
DISPLAY
5.99 ⬛ NOM%
5.99
2 ⬛ P/YR
2
⬛ EFF%
6.0797
12 ⬛ P/YR
12
⬛ NOM%
5.91659
425653.42 +/– FV
–425,653.42
60 N
60
PV
479,592.848502
The market value of the offer is calculated as follows:
Market Value of Mortgage
$479,593
+
Cash Down Payment
+80,000
Market Value of Offer
$559,593
