L3 Financing Real Estate to Students

11 for 240 months total interest will be 1642607 11011

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Unformatted text preview: . Advantages?? Disadvantages?? Advantages of GEM Homeowner will own the property free and clear in shorter time period. Total interest paid is substantially less. Homeowner may obtain a lower rate of interest than on the traditional 20-year fixed rate loan. This instrument also finds broad appeal among institutional investors and pension funds in the U.S. because of the relatively secure nature of the investment and the shorter time period of time over which their capital is tied up. monthly payment increases may outstrip the borrower’s salary increases, thereby making the possibility of default more likely. M ain disadvantage of the GEM mortgage is that the 2 . Rapid - P aym ent M ortgages (RP M ) The RPM is another means of obtaining the benefits of the GEM mortgage without incurring the disadvantage of increasing monthly payments. its term shortened from the traditional, say 25 or 30 years, to 10 or 15 years. RPM is just the standard, fixed rate mortgage with Seemingly, shortening the term of the loan would greatly increase the fixed monthly principal and interest payment. Such is not the case. RPM Contd. Example. Consider a $1,000,000, 12.5% fixed-rate mortgage. Monthly principal and interest payment on 20 year term is $11,361. Monthly principal and interest payment on 10 year term is $14,638-a difference of only $3,277 per month. 1 − (1 + r ) − n Loan = PMT r As an incentive to the borrower, many lenders may offer a reduced interest rate of 1/2 to 1 percent below the 20 year rates, since the mortgage will be repaid in full in substantially shorter period of time. In this case, the monthly payment differential between the RPM 10-year loan and the traditional 20-year is even less. The monthly principal and interest differential on a $1,000,000, 20 year mortgage at 12.5%-- as compared with a $1,000,000 10-year loan at 11%--is only $863. 3 . Biw eekly M ortgages Biweekly mortgage is another variation of the conventional fixed rate mortgage. Banks in Hong Kong also offer biweekly option to mortgage borrowers. Main difference between biweekly and the traditional, say 20 year, fixed rate mortgage is that the borrower makes a payment every 2 weeks instead of every month. Biweekly payments reduce the principal balance faster, resulting in a much shorter loan term. Example-Biweekly Mortgages 1 − (1 + r ) − n Loan = PMT r With the traditional 20-year, fixed rate mortgage on a $10,000 loan at 12.5%, the monthly payments are $113.61, and the loan is of course paid off in 20 years. During the term of the loan, the borrower will have paid interest totaling $17,266.4 (=113.61 * 240 - 10000). With the biweekly loan, the biweekly payment is $113.61/2 = $56.81 Loan will be paid off in 15 years; and the total interest is $12,181.27-- a savings of $5085.17. Details ? Biweekly interest = 12.5%/26 * Previous Loan Balance Biweekly Mortgage Payments Payment Scheme Biweekly Mortgage of $10,000 at 12.5% amortized over 20 years Biweekly Biweekly Biweekly Biweekly P...
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This note was uploaded on 09/06/2010 for the course FINA FINA0805 taught by Professor Tse during the Spring '09 term at HKU.

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