05/13/2009
Real Estate Finance
Homework #3 Solutions
File:
REFHW#3SFall2007
Real Estate Finance
Homework #3 Solutions
Fall 2007
Problem 1 (a)
House price =
$120,000
Loan A
80% loan
Loan B
90%
$96,000 loan amount
$108,000 loan amount
9.00% rate
9.50% rate
25 year amort
25 year amort
($805.63)
Monthly pmt
($943.59)
Monthly pmt
Difference in loan proceeds =
$12,000
Difference in mo. pmt =
($137.96)
Term =
300
I =
13.29%
1 (b)
Loan B
$108,000
points
$(2,160)
Loan B proceeds
$105,840
Difference in loan proceeds =
$9,840
Difference in mo. Pmt =
($137.96)
Term =
300
I =
16.55%
1 (c)
Loan A
Loan A
PMT
($805.63)
PMT
($943.59)
I
9.00%
I
9.50%
N
240
N
240
PV
$89,541.54 loan balance EOY 5
PV
$101,229.57 loan balance EOY 5
Difference in loan proceeds =
$9,840
Difference in mo. Pmt =
($137.96)
Difference in Loan Balance EOY 5
($11,688.03)
Term =
60
I =
19.10%
Problem 2 (a)
Old Loan
New Loan
PV =
$150,000.00
PV =
$144,861.48
I =
10.00%
I =
9.00%
N =
360
N =
300
PMT =
($1,316.36)
PMT =
($1,215.67)
Balance at end of year 5
New Loan
$144,861.48
I =
10.00%
less:
Points
(2,897.23)
N =
300
less:
OOP
(2,000.00)
PMT =
($1,316.36)
Loan Proceeds
$139,964.25
PV =
$144,861.48
PV =
$139,964.25
PMT =
($1,215.67)
N =
300
I =
9.43%
The Effective Borrowing Cost of the new loan is lower than 10% therefore, the borrower should refinance.
Alternate Solution: