FIN B457F Real Estate Finance Assignment Due Date: 23 December 2020 Question 1 (50 marks) Limited Mortgage Company Limited is offering a new mortgage instrument called the Stable Mortgage. This mortgage is composed of both a fixed rate and an adjustable rate component. Ms Ho is interested in financing a property, which costs $100,000, and is to be financed by Stable Mortgage on the following terms: The mortgage requires a 5% down payment, costs the borrower 2 discount points, and allows 75% of the mortgage to be fixed and 25% to be adjustable. The fixed portion of the loan is for 30 years at an annual interest rate of 10.5%. With neither interest rate cap nor payment cap, the adjustable portion is also for 30 years with the following terms: Initial interest rate = 9% Index - one-year Treasuries Payments reset each year Margin-2% Interest rate cap - None Payment cap = None The projected one-year U.S. Treasury-bill index, to which the adjustable rate mortgage is tied, is as follows: Beginning of Year (BOY)2 - 10% (BOY) 3 = 11% (BOY) 4 -8% (BOY) 5-12% (a) Calculate Ms Ho's total monthly payments and end of the year loan balances for each of the first five years. (30 marks) (b) Calculate the lender's yield if Ms Ho repays the loan after five-years. (10 marks) (c) Is it worth for Ms Ho to pay 10% down payment instead? Elaborate your answer. (10 marks) FIN B457F Real Estate Finance Assignment Due Date: 23 December 2020 Question 1 (50 marks) Limited Mortgage Company Limited is offering a new mortgage instrument called the Stable Mortgage. This mortgage is composed of both a fixed rate and an adjustable rate component. Ms Ho is interested in financing a property, which costs $100,000, and is to be financed by Stable Mortgage on the following terms: The mortgage requires a 5% down payment, costs the borrower 2 discount points, and allows 75% of the mortgage to be fixed and 25% to be adjustable. The fixed portion of the loan is for 30 years at an annual interest rate of 10.5%. With neither interest rate cap nor payment cap, the adjustable portion is also for 30 years with the following terms: Initial interest rate = 9% Index - one-year Treasuries Payments reset each year Margin-2% Interest rate cap - None Payment cap = None The projected one-year U.S. Treasury-bill index, to which the adjustable rate mortgage is tied, is as follows: Beginning of Year (BOY)2 - 10% (BOY) 3 = 11% (BOY) 4 -8% (BOY) 5-12% (a) Calculate Ms Ho's total monthly payments and end of the year loan balances for each of the first five years. (30 marks) (b) Calculate the lender's yield if Ms Ho repays the loan after five-years. (10 marks) (c) Is it worth for Ms Ho to pay 10% down payment instead? Elaborate your answer. (10 marks)
