L3 Financing Real Estate to Students

Example negative amortization consider a 10 year 12 1

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Unformatted text preview: M: 1 − 1.01 1000000 = 8000 0.01 −48 10 yrs −72 1 − 1.01 1 + PMT 48 1.01 0.01 The monthly payments beginning from the first month of year 5 is $22,011. Example-Negative Amortization Contd Recall the 12%, 10-year mortgage of $1m with monthly payments equal to $8,000 for the first 4 years and $22011 for the remaining term. Month 0 1 2 : 48 49 : 120 22011 0 8000 22011 1125871 1115119 PMT -8000 8000 Interest -10000 10020 Principal -(2000) (2020) Balance 1000000 1002000 1004020 Negative Amortization Risk indicator (quality indicator) for mortgages is the LOAN/VALUE ratio!! LOAN/VALUE > 1 mortgage is risky (Negative Net Worth to Homeowners) LOAN/VALUE < 1 mortgage is safe (usually less than 70%). Negative Net Worth Number of Cases Source: Hong Kong Monetary Authority 120000 100000 80000 60000 40000 20000 0 105697 10948 2568 Q103 Q203 Q303 Q403 Q104 Q204 Q304 Q404 Q105 Q205 Q305 Q405 Q106 Q206 Q306 Q406 Q107 Q207 Q307 Q407 Q108 Q208 Q308 Q408 III. Adjustable Rate Mortgages (ARMs) A conventional adjustable rate loan has the borrower sharing the risk of a fluctuating interest rate economy with the lender. In Hong Kong, the ARM allows the lender to make interest rate adjustments by referring to the prime rate which is closely affected by the Federal Reserve policy in the United States (because of the linked exchange rate system between HK$ and US$). ARM in Hong Kong ARM in Hong Kong allows the borrower two alternatives for adjustment when mortgage interest rate increases/decreases. The borrower can either opt for an increase/decrease in monthly payments with the same term or an extended/shortened term with the monthly payments unchanged. Example-ARMs Adjustable Rate Mortgage Monthly Mortgage Payments and Interest Rates (Mortgage Balance = 1,000,000) Mortgage Interest 5 years 10 years 12 years 15 years 20 years Rates $7,164.31 $8,438.57 $9,758.50 6.0% $19,332.80 $11,102.05 $7,455.73 $8,711.07 6.5% $19,566.15 $11,354.80 $10,019.21 $7,752.99 $8,988.28 7.0% $19,801.20 $11,610.85 $10,283.81 $8,055.93 $9,270.12 7.5% $20,037.95 $11,870.18 $10,552.26 $8,364.40 $9,556.52 8.0% $20,276.39 $12,132.76 $10,824.53 $8,678.23 $9,847.40 8.5% $20,516.53 $12,398.57 $11,100.56 $8,997.26 9.0% $20,758.36 $12,667.58 $11,380.31 $10,142.67 $9,321.31 9.5% $21,001.86 $12,939.76 $11,663.73 $10,442.25 $9,650.22 10.0% $21,247.04 $13,215.07 $11,950.78 $10,746.05 $9,983.80 10.5% $21,493.90 $13,493.50 $12,241.41 $11,053.99 11.0% $21,742.42 $13,775.00 $12,535.55 $11,365.97 $10,321.88 11.5% $21,992.61 $14,059.54 $12,833.17 $11,681.90 $10,664.30 12.0% $22,244.45 $14,347.09 $13,134.19 $12,001.68 $11,010.86 12.5% $22,497.94 $14,637.62 $13,438.57 $12,325.22 $11,361.41 13.0% $22,753.07 $14,931.07 $13,746.25 $12,652.42 $11,715.76 M ortgage R ates in H ong K ong Bank HSBC1 Bank of China2 Mortgage interest rates in Hong Kong are linked to the prime interest rates at which banks lend money to corporations with the best credit standing. Table presents the various mortgage terms offered by d...
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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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