Real Estate Finance Home Assignment 3 Solutions Manual provides comprehensive solutions for mortgage loan applications. Authored by Knut Sagmo, this manual is designed for students studying real estate finance. It includes detailed calculations for monthly payments, refinancing costs, and internal rates of return. The manual covers various problems from exams, offering insights into equity shares and loan balances over time. Ideal for finance students preparing for exams or professionals seeking to understand residential mortgage calculations.

Key Points

  • Includes solutions for mortgage loan applications with detailed calculations.
  • Covers equity-share analysis and refinancing costs for real estate finance.
  • Provides insights into internal rates of return for cash flows.
  • Features exam problems from 2010 and 2008 for practical application.
Camille Langlois
Author:Knut Sagmo
6 pages
Language:English
Type:Solution Manual
Accounting
Camille Langlois
Author:Knut Sagmo
6 pages
Language:English
Type:Solution Manual
Accounting
174
/ 6
BI-Norwegian Business School
ELE 3736
REAL ESTATE
FINANCE
Home Assignment 3
Some Residential
Mortgage Loan
Applications
Solutions Manual
Instructor
Knut Sagmo, Ph.D.
ELE 3736 Real Estate Finance Solutions Manual – Home Assignment 3
c
Knut Sagmo 2
Problem 1 Exam 20/12/2010: Problem 1
(a) Monthly payment ≡
¯
X fully amortizing the loan over 30 year maturity term
NOK 6,000,000 =
¯
X ·
(1.004167)
12×30
− 1
0.004167(1.004167)
12×30
=
¯
X · (186.2816),
¯
X
∼
=
32,209
(b) Monthly payment ≡
¯
X satisfying that the equity-share = 50% after 10 years?
Expected value of flat after 10 years: NOK 6, 000, 000 · (1.03)
10
= NOK 8,063,498
Loan balance after 10 years|
¯
X=32,209 = NOK 4,880,524
Equity after 10 years: = NOK 3,182,974
EK-share after 10 years: N OK
3, 182, 974
8, 063, 498
= 0.3947 → No!
(c) Monthly pmt ≡
¨
X satisfying that required equity-share = 50% after 10 years?
Expected value of flat after 10 years: NOK 6, 000, 000 · (1.04)
10
= NOK 8,881,466
Required loan balance after 10 years:
1
2
· (NOK 8, 881, 466) = NOK 4,440,733
The required loan balance of NOK 4,440,733 after 10 years (for PV = NOK 6,000,000,
I/Y = 5%, P/Y = 12, N = 120, and FV = 4,440,733) implies that monthly pmt must
equal NOK 35,041
Problem 2
Exam 20/12/2010: Problem 2
(a) Costs of refinancing the existing loan
Given PV = 5,000,000; I/Y = 6% p.a.; P/Y = 12, T = 30 implies that
¯
X = 29,977.53
and the loan balance after five years (LB
60 mo)
equals NOK 4,652,718.
Total costs of refinancing = [0.05 × NOK4, 652, 718] + NOK 20,000 = NOK 252,636
ELE 3736 Real Estate Finance Solutions Manual – Home Assignment 3
c
Knut Sagmo 3
Problem 2, con’t
Exam 20/12/2010: Problem 2
(b) Monthly reduction of pmt for remaining 300 months after refinancing?
Existing loan: pmt = NOK 29,977.53 per month
Refinanced loan: pmt = NOK 27,199.33 per month
Reduced pmt = NOK 2,778.20 per month
(c) The incremental (”difference”) cash flow’s internal rate of return
-252,636 +
P
300
t=1
2, 778.20(1 + i)
−t
= 0
i
per year
= 1.052075× 12 = 12.6249% ≡ the bond-equivalent rate of return
Refinancing absolutely worthwhile given an opportunity cost of capital of 5%!
Problem 3
Exam 21/05/2008: Problem 1
For detailing the calculations, see the enclosed excel-file SolMal Problem 3.xlsx
(a) Estimated sales price (market value) of apartment in five years time
150,000·(1.065)
5
= 205,513
(b) Annual payment,
¯
X, to lender and the loan amortization schedule
130,000 =
¯
X ·
(1.07)
30
− 1
0.07(1.07)
30
=
¯
X · (12.409041),
¯
X
∼
=
10,476 = payment
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
BOY balance 130,000 130,000 128,624 127,151 125,576 123,890
Annual pmt -10,476 -10,476 -10,476 -10,476 -10,476
Interest -9,100 -9,004 -8,901 -8,790 -8,672
Principal -1,376 -1,473 -1,576 1,686 -1,804
EOY balance 128,624 127,151 125,576 123,890 122,086
/ 6
End of Document
174

You May Also Like

FAQs

What are the key calculations in the mortgage loan solutions?
The solutions manual details calculations for monthly payments on a NOK 6,000,000 loan, amortized over 30 years. It provides formulas for determining equity shares after 10 years, including expected property values and loan balances. The manual also explains how to calculate refinancing costs and the impact of different interest rates on monthly payments.
How does the manual address refinancing options?
Refinancing options are explored through calculations of existing loan payments and the potential savings from refinancing. The manual illustrates how to determine the monthly payment reduction after refinancing and evaluates the internal rate of return on the incremental cash flows from refinancing decisions.
What topics are covered in the exam problems included in the manual?
The exam problems cover various aspects of real estate finance, including mortgage calculations, equity shares, and refinancing strategies. Specific problems from exams dated 2010 and 2008 are included, providing practical scenarios for students to analyze and solve.
What is the significance of the internal rate of return in this context?
The internal rate of return (IRR) is crucial for evaluating the profitability of refinancing options. The manual provides calculations that demonstrate how to assess the IRR of cash flows associated with different mortgage scenarios, helping students understand the financial implications of their decisions.

Related