Real Estate FinanceTutorial 1Team Members:NgewXinJie A0074471ELau Yung Yen A0074577RLi Zhe A0078701ELiu Mengyi A0070119NGao Han A0073228HChen Tianyi A0073854X
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.
2(i)a Effective costs ofRefinancing 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
2(i)a Effective costs ofRefinancing 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
2b b) Would your answer to part (a) change if he plans to own the property for only five more years? Why?
2b No. Even he only plans to own the property for five more years, he has to continue to pay the loan.
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?
2c Yield For RefinancingOpportunity 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