L3 Financing Real Estate to Students

The main recent charges made by the hong kong

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Unformatted text preview: or 2 days right after the Federal Reserve Board has announced the rate increase. During the period of falling interest rate, most banks reduce their prime rates effective from as long as 3 days to 4.8 days. The rate increase may cause financial trouble to mortgage borrowers. There are two prime rates in the market, which causes confusion to borrowers and potential borrowers as to the best borrowing choices available. There is a lack of transparency in the adjustment of interest rates by banks to the changes in the Fed Funds rate, and hence consumers can’t tell whether the adjustment is reasonable. Mortgage and Homeownership Choice Issues regarding choosing mortgages and changing home ownership: Must know the prime rate and prime-minus policies of different banks in order to figure out the actual mortgage interest rates If the borrower decides to prepay because of refinancing, changing home ownership, or selling property within the first 3 years of mortgage period, must pay attention to penalty payment in terms of interest payment and various implicit or explicit processing fees as stipulated in the mortgage agreement. Is there a need for fixed rate mortgage? Not if the planned ownership is short. Mortgage and Homeownership Choice Issues regarding choosing mortgages and changing home ownership: Cash rebate can satisfy borrower’s liquidity need. However it may also take away other benefits to the borrowers. Some banks also allow their mortgage clients to enjoy higher savings interest rate. Have to balance between the higher savings rate and other benefits in order to determine the best mortgage loan. When changing home ownership, if the new home is of newer property type with the potential of faster increase in market value, the borrower should consider buying the new property first and selling the current property later. If the new home is not perceived to increase quickly in market value, the borrower should consider selling the current home first before buying the new home. IV. Shared-Appreciation Mortgages (SAM) Shared-appreciation (or equity participation) loan has been mainly used by commercial lenders in the United States. At times, banks in Hong Kong also offer some financing scheme similar to SAM for real estate development. Lender offers the borrower a fixed-rate mortgage at below the market rates in exchange for a share of the profits either upon resale or after a stipulated period of time, usually 5 to 10 years. Under the terms of the mortgage, the lender usually promises to refinance the property with a long-term mortgage after the pre-designated 5- to 10-year period, thereby enabling the buyer to pay the lender’s share of the property appreciation even if the property is not sold. ExampleSAM 1 − (1 + 9% / 12) −360 ⇒ PMT = 48277.35 6mill = PMT 9% / 12 Balance yr10 1 − (1 + 9% / 12) −240 = 5365784.6 = 48277.35 9% / 12 Assume a developer has a real estate project valued at $7.5 mill and borrows a 30-yr, $6 mill below market fixed rate SAM mortgage a...
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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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