L3 Financing Real Estate to Students

27 a savings of 508517 details biweekly interest

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Unformatted text preview: eriod Payment Interest Principal Balance 10000 0 9991.270 48.07692 8.730104 56.80703 1 9982.498 48.03495 8.772076 56.80703 2 9973.684 47.99278 8.814250 56.80703 3 9964.827 47.95040 8.856626 56.80703 4 9955.928 47.90782 8.899206 56.80703 5 9946.986 47.86504 8.941990 56.80703 6 9938.001 47.82205 8.984981 56.80703 7 9928.973 47.77885 9.028178 56.80703 8 9919.901 47.73545 9.071582 56.80703 9 9910.786 47.69183 9.115196 56.80703 10 9901.627 47.64801 9.159019 56.80703 11 9892.424 47.60397 9.203053 56.80703 12 140.567 0.944378 55.86265 56.80703 388 84.436 0.675807 56.13122 56.80703 389 28.035 0.405946 56.40108 56.80703 390 0 0.134787 28.03561 28.17040 391 TOTAL $12,181.27 About Biweekly Mortgage 1 − (1 + 12.5% / 12) −60 $113.61* = $5049.98 12.5% / 12 The balance of the biweekly mortgage at any point of time is simply the present value of all the future remaining biweekly payments with the biweekly discount rate being r/26 where r is the annual mortgage interest rate. It is interesting to note that the loan balance on the traditional 20-year fixed rate mortgage with monthly payments after 15 years is $5,049.98. Since the lenders have lent their money for a shorter period of time, they may offer the biweekly mortgage at an interest rate of 1/2 to 1 percent less than that for the traditional 20 year mortgage. 4. Graduated Payment Mortgage (GPM) GPM provides for reduced monthly payments during the early years of the loan. Payment Level | | GPM | ____________________________________ | | ________ | | ________ CPM |.................................................................... | ________ | |_______ | |_______|_______|_______|_______|_______|______.....________________|_ 0 1 2 3 4 5...................... n years Payments rise by a predetermined amount every year for an agreed upon amount of time, usually up to say 10 years. Payments then remained fixed for the balance of the mortgage term. GPM Who would borrow GPM?? GPM allows the homeowner to acquire a more expensive home than he/she could otherwise afford because of the initially lower monthly payments. The main disadvantages are negative amortization and increasing monthly payments in the early years of the loan. Negative Amortization ?? GPM Negative Amortization Whenever the monthly payment on a loan is insufficient to cover all the interest charges, the deferred (unpaid) interest charges are added to the loan balance. In this instance, the loan balance actually increases rather than decreases -- negative amortization. Negative amortization is not always bad. If the homeowner lives in an apartment where the value of housing is growing at a faster rate than the outstanding loan balance is increasing yearly, it would pay for the borrower to buy the house now using a GPM mortgage. Example-Negative Amortization Consider a 10-year, 12%, $1 million mortgage. The monthly payments for the first 4 years are fixed at $8,000. The monthly payment for CPM is 1 − (1 + 12% / 12) −120 ⇒ pmt = $14,347.1 1000000 = pmt 12% / 12 PMT = ??? CPM: $14347 $8000 4 yrs GP...
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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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