Chapter 4 Learning Objectives Understand how residential lending evolved from the earliest of times through World War II Understand the mechanics of the standard fixedrate mortgage History Of Real Estate Finance ID: 783709
Download The PPT/PDF document "Chapter 4 History of Real Estate Finance..." is the property of its rightful owner. Permission is granted to download and print the materials on this web site for personal, non-commercial use only, and to display it on your personal computer provided you do not modify the materials and that you retain all copyright notices contained in the materials. By downloading content from our website, you accept the terms of this agreement.
Slide1
Chapter 4
History of Real Estate Finance and the Fixed-Rate Mortgage
Slide2Chapter 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
Slide3History 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
Slide4History Of Real Estate Finance
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
Slide5History Of Real Estate Finance
ENGLISH LAW
Concept of usury in that charging interest was sinful
Equitable Right Of Redemption - Allowing borrower to redeem the property after default
Slide6History Of Real Estate Finance
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
Slide7History Of Real Estate Finance
Early 1900s through 1920s
Federal Reserve in 1913 allowed banks to write 5-year, 50% loan-to-value ratio, non-amortizing mortgages
Building and Loan Associations expanded rapidly
Real estate prices rose rapidly
After 1929 market crash, real estate prices dropped dramatically
Slide8History Of Real Estate Finance
1930s
Market crash in 1929 ushered in the Great Depression
Banking system collapsed, money supply plummeted, unemployment soared
Refinancing short-term, non-amortizing loans became a problem
A number of federal agencies created including FSLIC (1934), FHA (1934), and Fannie Mae (1938)
Slide9Fixed-Rate Mortgages
PRESENT VALUE OF AN ANNUITY
PV
ANN
=
(1+i)
n
– 1
(i) (1+i)
n
MORTGAGE CONSTANT
MC
i
=
(i) (1+i)
n
(1+i)
n
- 1
Slide10Fixed-Rate Mortgages
IMPORTANT VARIABLES
Amount Borrowed
Contract Interest Rate
Maturity (Term)
Outstanding Balance
Amortization
Payment
Financing Costs Including Discount Points
Annual Percentage Rate (APR)
Slide11Fixed-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?
Slide12Fixed-Rate Mortgages
PMT = AMT. BORROWED (MC
i,n
)
PMT = $100,000 (MC
7.5,30
)
PMT = $100,000 x
(.075/12) (1+.075/12)
360
(1+.075/12)
360
– 1
= $100,000 (.0069921)
= $699.21
Slide13Fixed-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.
Slide14Fixed-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
Slide15Fixed-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)
Slide16Fixed-Rate Mortgages
Annual Percentage Rate (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
Slide17Fixed-Rate Mortgages
Slide18Fixed-Rate Mortgages
Slide19Trade Off Between Contract Rate and Discount Points
Contract Rate
7%
6.75%
6.50%
6.25%
Discount Points
0
1.00
2.875
3.00
Slide20Calculating The APR
Assumption: Borrow $100,000 for 30 years, monthly payments
7% & O pts:
100,000 - 0 = $665.30 (PVAF
i/12,360
)
i =7%
6.75% & 1 pt:
100,000 - 1,000 = $648.60 (PVAF
i/12,360
)
i = 6.85%
Slide21Calculating The APR Cont.
6.50% & 2.875 pts:
100,000-2,875= $632.07 (PVAF
i/12,360
)
i = 6.78%
6.25% & 3 pts:
100,000-3,000= $615.72(PVAF
i/12,360
)
i = 6.54%
Slide22Calculating 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 (PVAF
i/12,60
) + $94,132 (PVF
i/12,60
)
i = 7%
6.75% & 1 pt:
$100,000 - $1,000 = $648.60 (PVAF
i/12,60
) + $93,876 (PVF
i/12,60
)
i = 6.99%
Slide23Calculating the Effective Cost Under Shortened Holding Period
6.50% & 2.875 pts:
$100,000 - 2,875 =
$632.07(PVAF
i/12,60
) + $93,611(PVF
i/12,60
)
i = 7.2%
6.25% & 3 pts:
$100,000 - $3,000 = $615.72(PVAF
i/12,60
) + $93,337(PVF
i/12,60
)
i = 6.98%
Slide24Summary 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%
Slide25Prepayment 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
Balance
EOY5
=
94,617
Effective cost with no points
$100,000 - 0 = $699.21(PVAF
i/12,60
)+$94,617(1.05)(PVF
i/12,60
)
i = 8.28%
Slide26Fifteen Year Mortgage
Borrow $100,000 at 7.50% for 15 years, monthly payments
PMT
15
=
$100,000( MC
7.5,15
) = $927.01
PMT
30
= $100,000 (MC
7.5,30
) = $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
Slide27Extra Payment Monthly
PMT= $100,000 (MC
7.5,30
) = $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 (PVAF
7.5/12, n
)
n= 279.84, approximately 23 years
Amount saved
$699.21 ( 80.16) - $58.27 (279.84)
$56,049 - $16,306 =
$39, 743
Slide28Calculating Discount Points
Suppose you borrow $100,000 at 7% for 30 years, monthly payments. The APR on the loan is 7.25%. What amount of points were charged?
100,000 – pts = 665.30 (PVAF
7.25/12, 360
)
100,000 – pts = 97526
Pts = $2474
2474/100,000 = 2.47 points
Slide29Extra Payment-Lump Sum
PMT= $100,000 ( MC
7.5,30
) = $699.21
$10,000 Extra paid at the end of year 3
BAL
EOY3
: $97,014
Minus extra payment: $10,000
New balance
EOY3
: $87,014
Number of payments remaining after extra payment
$87,014= $699.21 ( PVAF
7.5/12, n
)
n= 241.41
Amount saved:
$699.21 (82.59) - $10,000=
$47,748
Slide30Calculating Discount Points w/ a Shortened Holding Period
Suppose you take a FRM for $100,000 at 7% for 30 years, monthly payments. The effective cost with a 5-year holding period is 7.375%. What amount of discount points were charged?
100,000 – pts = 665.30 (PVAF
7.375/12, 60
)
+ 94,132 (PVF
7.375/12, 60
)
100,000 – pts = 98476
pts = $1524 or 1524/100,000 =
1.524 pts
Slide31Equalizing APRs
Option 1: $100,000 at 6.5% for 30 years, monthly payments. APR = 6.60%
Option 2: $100,000 at 6.25% for 30 years, monthly payments. How many points must be charged to equalize the APR on the two options?
Slide32Equalizing APRs (con’t)
100,000 – pts = 615.72 (PVAF
6.60/12, 360
)
100,000 – pts = 96,408
Pts = $3,592
Pts = 3,592/100,000 =
3.592 pts
Slide33Calculating Financing Fees Other Than Discount Points
You borrow $100,000 at 6% for 30 years, mthly pmts. You pay 2.50 discount points. Your APR is 6.375%. What is the amount of your other fees?
100,000 – 2,500 – fees =
599.55 (PVAF
6.375/12, 360
)
100,000 – 2,500 – fees = 96,102
Other Financing Fees =
$1,398
Slide34Interest-Only Fixed-Rate Mortgage
Suppose you take a $140,000, 10/20 interest-only FRM at 7%, monthly payments.
What is the interest-only payment?
Pmt = 140,000 (.07/12) = $816.67
What is the payment for the last 20 years to fully amortize the loan?
Pmt = 140,000 (MC
7, 20
) = $1085.42
What is the balance at the EOY20?
Bal
EOY20
= 1085.42 (PVAF
7/12, 120
) = $93,483