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6 Apr 2018

Mary Smith wants to buy a property for $250,000 and obtains an 80 percent loan. This loan can be obtained for 25 years at 5.75 percent interest (monthly payments) with two points charged on the loan.

a. What dollar amount will the lender actually disburse?

b. What is the monthly payment?

c. How much interest is paid in year 6?

d. Assume the lender imposes a prepayment penalty of 1 percent of the outstanding loan balance if the loan is repaid within the first eight years. If Doe repays the loan after five years, what is the effective interest cost?

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Sixta Kovacek
Sixta KovacekLv2
7 Apr 2018

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John took a mortgage loan 5 years ago for $120,000 at 7% interest for 15 years, to be paid in monthly payments. Now, a lender is offering him a new mortgage loan at 5% for 10 years. The new loan amount is $92,895, the outstanding loan balance of the existing loan. Suppose that a prepayment penalty of 3% must be paid if John refinances the existing loan. Moreover, the lender who is making the new loan requires an origination fee of $3,000. John plans to hold the property for 10 years. Note: John has to pay the refinancing fees (i.e., the origination fee and the prepayment penalty) out of his pocket.

(a) What is the total financing cost (not include the loan amount itself) if John decides to refinance the old loan?

(b) What is the monthly savings that John could realize by refinancing?

(c) Given the information provided here, should John refinance? Please support your answer by calculating the effective interest rate of the new loan.

(d) Now suppose that John’s current income is low. The new lender allows him to pay a monthly payment of $300 for the new loan (i.e., the actual monthly payment to the lender is only $300, while the loan interest rate is 5%). In this situation, negative amortization occurs. What will be the accrued interest or the amount of increased loan balance for the loan three years later from now?

(e) Assume that John has to borrow two loans in order to refinance. That is, he has to borrow a new mortgage ($70,000) at 5% for 10 years (i.e., the loan maturity and the amortization period are the same, 10 years) and another mortgage ($22,895) at 9% for 5 years (the loan maturity and the amortization period are the same, 5 years). In this case, with the same origination fee of $3,000 (i.e., a total of $3,000 for the two loans) and the prepayment penalty of 3%, should John go ahead with the refinancing plan? Why?

(I primarily need assistance with Sections D and E as I believe I have A-C correct)

Please show work for both problems and I will give a thumbs up!

5. You are considering the purchase of a quadruplex apartment building. Effective gross income during the first year of operations is expected to be $33,600 ($700 per month per unit). First-year operating expenses are expected to be $13,440 (at 40 percent of EGI). Ignore capital expenditures. The purchase price of the quadruplex is $200,000. The acquisition will be financed with $60,000 in equity and a $140,000 standard fixed-rate mortgage. The interest rate on the debt financing is 8 percent and the loan term is 30 years. Assume, for simplicity, that payments will be made annually and that there are no up-front financing costs.
a. What is the overall capitalization rate?
b. What is the effective gross income multiplier?
c. What is the equity dividend rate (the before-tax return on equity)?
d. What is the debt coverage ratio?
e. Assume the lender requires a minimum debt coverage ratio of 1.2. What is the largest loan that you could obtain if you decide that you want to borrow more than $140,000?
12. An office building is purchased with the following projected cash flows:
• NOI is expected to be $130,000 in year 1 with 5 percent annual increases.
• The purchase price of the property is $720,000.
• 100 percent equity financing is used to purchase the property.
• The property is sold at the end of year 4 for $860,000 with selling costs of 4 percent.
• The required unlevered rate of return is 14 percent.
a. Calculate the unlevered internal rate of return (IRR).
b. Calculate the unlevered net present value (NPV).
2. Health Care Event Protection. Christina Haley of San Marcos, Texas, age 57, recently suffered a stroke. She was in intensive care for 3 days and was hospitalized for 10 more days. Her total bill for this care was $125,500. After being discharged from the hospital, she spent 25 days in a nursing home at a cost of $170 per day. Christina, who earns $4,500 per month, missed two months of work. Christina had a health insurance plan through her employer. The policy had a $1000 deductible and an 80/20 coinsurance clause with a $2000 coinsurance cap. She had also accumulated 21 sick days (equivalent to one month) at work. Otherwise she had no long-term care or disability income insurance.
(a) How much of Christina's direct medical expenses was paid by her insurance policy?
(b) What did Christina have to pay for her nursing home care?
(c) How much income did Christina lose?
1. Calculating Life Insurance Need. Review the material in “How Much Life Insurance Do You Need?” on pages 351–354. Then using dollar amounts that fit your personal situation, complete Worksheet 48: Determining My Life Insurance Needs from “My Personal Financial Planner.” If you are currently single and childless, for the purposes of this activity, assume that you are 30 years old, have two children under age 5, are married, and earn $60,000 per year and redo the estimate of need. How would having a family change your need for life insurance?
Determining My Life Insurance Needs (page 353)
NOTE: Results here may differ slightly than when using Appendix A in text due to rounding.
Factors Affecting Need
Sample Only
Insert Your Own Figures
1. Income-replacement needs*
$823,219
2. Final-expense needs
$ 12,000
3. Readjustment-period needs
$ 19,000
4. Debt-repayment needs
$ 10,000
5. College-expense needs
$ 75,000
6. Other special needs
$ -
7. Subtotal (combined effects of items 1–6)
$ 939,219
8. Government benefits**
$390,370
9. Investment Assets Available
$0
10. Current Life Insurance In Place
$ 98,000
11. Life insurance needed
$ 450,848
*Income Replacement Needs Calculator
Current Annual Income
$56,000
Percent of Annual Income To Be Replaced
75%
Annuity Amount (% desired of annual income)
$42,000
i (assumed interest rate
3.00%
n (number of annuity payments)
30
PV (present value) of Income Replacement Needs
$823,219
**Present Value of Social Security Benefits Calculator
Estimated Monthly Benefit (See Appendix B in Text)
$2,725.00
Estimated Annual Benefit
$32,700
i (assumed interest rate
3.00%
n (number of annuity payments)
15
PV (present value) of Government Benefits
$390,370

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