The document summarizes a tutorial on real estate finance. It discusses questions about refinancing a mortgage. Specifically, it examines whether a borrower should refinance a $95,000 loan at 11% interest over 30 years if they can now get a 25-year loan at 10% interest. It determines that refinancing would save the borrower money due to the lower interest rate being below the effective cost of the original loan. The minimum return needed on alternative investments is also calculated to determine if refinancing is worthwhile. Key factors to consider for any refinancing decision are the costs, the yields on refinancing vs. other investments, and the effective cost of the original loan.

1. Real Estate Finance
Tutorial 1
Team Members:
NgewXinJie A0074471E
Lau Yung Yen A0074577R
Li Zhe A0078701E
Liu Mengyi A0070119N
Gao Han A0073228H
Chen Tianyi A0073854X

2.  Question 2
 2i) 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 be charged on the new loan and other closing
costs will be $2,000. All payments are monthly.
 a) Should the borrower refinance if he plans to own the
property for the remaining loan term? Assume that the
investor borrows only an amount equal to the outstanding
balance of the loan.

3. 2(i)a Effective costs of
Refinancing
 EOY1  EOY5
 n= 30 x12  n= 25 x12
 i=11%/12  i=11%/12
 PV=-$95000  Pmt=-$904.707
 FV=0  FV=0
 Cal pmt=$904.707  PV=$92306.413

4. 2(i)a Effective costs of
Refinancing
 Contractual loan  New loan Debt service
amount $92306.413
 n=25x12
 Total cost of taking a
new loan  i=10%/12
 $92306.413 X3%  PV=-$92306.413
+$2000=$4769.192
 Fv=0
 Net loan amount
 Cal pmt = $838.789
$875737.221

5. 2(i)a Effective costs of
Refinancing
 n= 25x12
 pmt = $838.789
 PV=-87537.221
 FV=0
 Cal i= 0.891%
 Therefore, Effective Costs of refinancing is
 0.891%x12= 10.7%
 Therefore, Since 10.7% < 11%, The borrower should
refinance

6. 2b
 b) Would your answer to part (a) change if he plans to
own the property for only five more years?
 Why?

7. 2b
 No. Even he only plans to own the property for
five more years, he has to continue to pay the
loan.

8. 2c
 Assuming that the investor plans to own the
property for the remaining loan term. What is the
minimum rate of return the investor expects if he
had used the amount meant to pay for the
refinancing costs to make an alternative
investment?

9. 2c Yield For Refinancing
Opportunity
 Monthly debt service for existing loan
 $904.707
 New loan Debt service
 pmt=$838.789
 Monthly savings for 25 years
 $904.707-$838.789=$65.918

10. Yield for Refinancing
Opportunity
 n=25X12
 Pmt=65.918
 PV=-4769.192
 FV=0
 Calc i=1.36%
 Yield= 1.36%x12=16.3%

11. 2d
 Assuming an alternative investment gives a return
of 18%. Should the investor refinancing his original
loan?

12. 2d
 No. Since 18%>16.3%, he should use this amount
to $4769.192 to make an alternative investment.

13. 2(ii)
What are the primary considerations that should
be made when refinancing?
 Save money
 The loan terms on your existing loan
 The loan terms on your new loan
 The cost of switching

14. 2(iii)
What factors must be considered when deciding
whether to refinance a loan after interest rates
have declined?

15. 2(iii)
 The cost of refinance
 Prepayment penalty on the existing loan
 Original fee and incidental closing cost on the new
loan
 The yield for the particular “refinance”
opportunity
 The yield for the alternative investment
 Effective cost of refinancing