## Quiz 6 :

Mortgages: Additional Concepts, Analysis, and Applications

Answer:

Cost of fund borrowings arise when funds required are took by the borrower through mortgage. These costs get incremented when the borrower plans to procure additional funds through second mortgage. The cost on mortgage for a borrower includes interest along with the principal payment. The cost of borrowings gets incremented when the mortgages value as well as interest on mortgage increases.

The incremental cost of fund borrowings is a process of assessment used for determining the additional costs that would rise with procurement of loans that has a higher interest rate as well as higher loan-to-value ratio. This measure is considered as significant because the contract rate on mortgage with a higher loan to value ratio forgoes the fact that this higher interest rate needs to be paid on whole loan value but not just on the value of additional funds borrowed. Hence the borrower must consider the incremental cost on additional funds in order to know the real cost of borrowing additional funds.

Answer:

Introduction:

Refinancing a loan refers to the situation of surrendering the existing loan and taking the fresh loan either from the same lender or from another lenders. The refinancing of the existing loan is made in order to avail the benefit of decline in the interest rate of the loan.

Factors to be considered while refinancing the loan:

The following factors should be considered while refinancing the loan:

1. Term of present outstanding loan : The term of current outstanding loan should have the condition to be repaid before the expiry of maturity period. The refinancing will be done after the prepayment of the existing loan.

2. New loan terms being considered : The terms and the conditions of the new loan should be examined before refinancing the existing loan.

3. Interest rate on the new loan : The interest rate on the new loan should be lower than the interest rate on the existing loan. The refinancing will be profitable when the existing interest rate is higher than the new interest rate.

4. Charges associated with the prepayment of the existing loan : The charges associated with the prepayment of the existing loan should be examined before refinancing. If the prepayment charge is higher than the overall interest saving from the refinancing then the refinancing should not be done.

Answer:

Loan repayment is referred to as an action of paying back money that which the borrower takes from the lender at a predefined interest rate. The usual loan repayments are made periodically and that includes portion of principal loan value along with the interest chargeable for periods accordingly with amortizations till the end of loan tenure.

The loan amount is $80,000 at 10% interest rate and 25 years of loan term.

Here, the payment in year 1 will be reduced by 50% and in year 2 it will reduce by 25%.

a.

The actual monthly payment amount is $726.96.

First, calculate the present value of total payment in year 1.

Note; here, " r " is the interest rate and " n " is the time period.

Hence, the PV of year 1 payment is $4,134.406.

Calculate the present value of total payment in year 1.

Hence, the PV of year 1 payment is $2,067.203.

Calculate the present value (PV) of the total payments.

In this case the second year reduction in payment is annuity that starts after a year. Hence, the builder needs to give for bank an upfront worth

.

b.

The present value of buy down loan worth is

.

Thus, the home is anticipated for a sale value of

more than of a similar home with no loan available.

Therefore, if the home can be purchased for $5,000 more, then the borrower could gain from the transaction in present value terms by $1,201.609 (i.e.

).