California Real Estate Finance Bond, McKenzie, Fesler

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California Real Estate FinanceBond, McKenzie,
Fesler BooneNinth Edition

• Chapter 13
• Basic Mathematics of Real Estate Finance

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Objectives

• After completing this chapter, you should be able
  to
• Differentiate between a straight note
  (interest-only) and an amortized note.
• Explain how financial calculators and computers
  are used to determine monthly payments, principal
  and interest allocation, balloon payments, price
  and yields on notes, plus a variety of other real
  estate calculations.
• Discuss how biweekly loan payments differ from
  traditional monthly payments.
• Understand what inputs are used to calculate the
  Annual Percentage Rate (APR) for a real estate
  loan.

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Outline

• Review of the basic components of a real estate
  loan
• The real world of financial calculators and
  computers
• Illustrated use of Calculated Industries
  Qualifier Plus IIIX Real Estate Calculator
• Annual Percentage Rates

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Review of the Basic Components of a Real Estate
Loan

• Interest
• Charge or price, expressed as dollars, paid for
  the use of money
• Principal
• Amount of money borrowed
• Rate
• Percentage of interest charged on the principal
  and usually expressed as an annual rate
• Time
• Denotes the length of the loan and the frequency
  of payments

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Review of Promissory Notes

• Straight Note (Interest-Only)
• Interest-Only payments
• Principal due in lump sum
• Amortized loan
• Installment Note (Fully amortized)
• Principal and interest
• Continue until entire obligation is repaid
• Installment Note (Partially amortized, with
  balloon payment)
• Principal and interest
• Not paid off by due date
• Balloon at end

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How to Compute Amortized Loan Payments

• Use Amortization Book
• Locate interest percentage page (See Table 13.1)
• Locate amount of loan
• Locate term or number of years
• Intersection is monthly payment
• Or use Table 13.2 for 1,000
• Locate term
• Locate rate of interest
• Intersection is payment
• Then multiply times amount of loan

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The Real World of Financial Calculators and
Computers

• Specialized for finance
• Computer programs
• Cell phones
• Texas Instruments BA-II Plus
• Hewlett-Packard 12C
• Calculated Industries Qualifier Plus IIIx

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Illustrated Use of Calculated Industries
Qualifier Plus IIIx Real Estate Calculator

• Keys
• Term (length of time)
• Int (Interest rate)
• Loan Amt (Amount of original principal)
• PMT (Payment, annual, monthly or daily)
• Shift Loan Amt (Future Value)

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Loan payments

• The Qualifier Plus IIIx calculator computes any
  type of loan payment.
• Annual, semiannual, quarterly, monthly, biweekly,
  weekly, or daily.
• All financial keys must be in the same time
  frame!
• Example On a 100,000 loan at 10 percent for 30
  years, what is the monthly payment?

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Making larger loan payments

• How fast will a loan be paid off if larger
  monthly payments are made?
• Example On a 100,000 loan at 10 percent for 30
  years, what is the monthly payment?

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Interest and Principal Allocation

• Borrowers want to know the breakdown of each
  payment into interest and principal, and what the
  remaining balance is.
• Example Assume a 100,000 loan at 10 percent for
  30 years. What is the monthly payment? What is
  the remaining loan balance? How much of the first
  payment is principal? Interest?

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Principal and interest allocation for 12 months

• Example Using the Qualifier Plus IIIx, assume a
  100,000 loan at 10 percent for 30 years. What is
  the monthly payment? What is the remaining loan
  balance after 12 payments? What is the principal
  paid for 12 months? What is the interest paid
  after making 12 monthly payments?

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Balloon payments

• Remaining loan balance and outstanding loan
  balance.
• To solve for the balance on a loan after a series
  of payments, all four parts of a loan must be in
  the calculator
• Term
• Interest
• Loan Amount
• Payment
• Example Use the Qualifier Plus IIIx for a
  100,000 loan at 10 percent amortized for 30
  years, but due in five years. What will be the
  balance after five years?

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More Complicated Calculations

• Calculating loan payments that include PITI
• See pp. 364-365
• Calculating monthly income needed to qualify for
  a loan
• See pp. 365-366
• Calculating what a buyer can afford to borrow and
  the price range of homes
• See pp. 366-367
• Finding the price of a note when you know the
  desired yield
• See pp. 367-368
• Calculating the yield when you know the discount
  price of the note
• See p. 368

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Biweekly loan payments

• Payments made every two weeks
• Approximates 13 payments per year
• Example Using the Qualifier Plus IIIx, for a
  100,000 loan at 10 percent for 30 years, what
  are the biweekly payments?

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Annual Percentage Rates

• Truth-in-Lending Law
• Must disclose
• Total scheduled to be paid over 30 years
• (733.76 x 360 months) 264,15525
• Less Original loan amount -10000000
• Total interest paid over scheduled life
• of the loan 164,15525
• Estimated costs of acquiring the financing
• APR
• Example Assume a 100,000 loan at 8 percent
  interest for 30 years, and the lender charges 1.5
  points, plus 1,000 in other financing fees
  covered by the Truth-In-Lending Law. What is the
  APR?

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Questions and Comments?