Chapter 14

What is the value of a discount point?

1% of the loan value and .125% added to the effective interest rate per point.

What is the value of an origination point?

1% of the loan value per point.

Sally and Sam have sold their home to Tina and Max. The closing is set for August 23. The yearly real estate taxes are $2,700. Using the 12 month/30 day method, what will be Sally and Sam's share of the taxes and how will they be handled on the settlement statement?

$2,700 ÷ 12 = $225 $225 ÷ 30 = $7.50 Seller's portion - $225 x 7 = $1,575 (January - July) $7.50 x 23 = $172.50 (August 1-23) $1,575 + $172.50 = $1,747.50 will be a debit to the seller and a credit to the buyer.

Paul, the buyer, will get the second quarter water bill at the end of June. The bill is $39.00 per quarter. If closing is on May 7, what will be Paul's share of the bill?

$39 ÷ 91 days = $.43 per day $.43 x 54 days (Paul's share of the 91 days) = $23.22

Calculate the break-even point and percent of occupancy needed to break even for the following project: Fixed cost - $100,000 per year Variable cost ratio - 20 percent per rental dollar 30,000 square feet of rentable space $5 per square foot per year

Break-even = Fixed costs ÷ (1- Variable cost ratio) Break-even = $100,000 ÷ (1 - 0.20) Break-even = $100,000 ÷ 0.80 Break-even = $125,000 30,000 sq. ft. x $5 = $150,000 $125,000 ÷ $150,000 = 0.8333 = 83 percent occupancy needed to break even

Calculate both the income and debt ratios and determine if they will qualify for either an FHA loan, a conventional loan, neither or both. Jeff and Gwen want to purchase a home for $159,900. Here are their facts: Monthly house payment: $960 Total gross income: $3,500 Monthly recurring debt: $300

Income ratio: 27.4% = $960 / $3,500 Conventional loans typically require this ratio to be under 28 percent. FHA guidelines require the income ratio to be no more than 31 percent. Debt ratio: 36% = ($960 + $300) / $3,500 Conventional loans usually require the debt ratio be 36 percent or lower, but FHA guidelines state the debt ratio may not be greater than 43 percent. Based on the above calculations, Jeff and Gwen would probably qualify for either a conventional loan or an FHA loan.

Calculate both the income and debt ratios and determine if they will qualify for either an FHA loan, a conventional loan, neither or both. David and Carol want to purchase a home for $224,500. Here are their facts: Monthly house payment: $1,345 Total gross income: $4,500 Monthly recurring debt: $280

Income ratio: 29.8% = $1,345 / $4,500 Conventional loans typically require this ratio to be under 28 percent. FHA guidelines require the income ratio to be no more than 31 percent. Debt ratio: 36.1% = ($1,345 + $280) / $4,500 Conventional loans usually require the debt ratio be 36 percent or lower, but FHA guidelines state the debt ratio may not be greater than 43 percent. Even though their debt ratio is within the allowed percentage (especially for FHA), David and Carol would probably not qualify for a conventional loan because of their income ratio. The income ratio is .8% higher than FHA likes, but they might qualify for the FHA loan, depending on how strict the lender was inclined to be.

Sally and Dan obtain a mortgage for $145,000 for 30 years at a fixed rate of 8.75 percent. When the lender runs the amortization calculation, the result will produce a monthly payment amount of $1,140.72. Calculate the allocation of principal and interest for the first five payments. Then calculate the total amount of principal and the total amount of interest Sally and Dan paid in the first five months.

Month 1 $145,000 x .0875 = $12,687.50 yearly interest due $12,687.50 ÷ 12 = $1,057.29 first month's interest $1,140.72 - 1,057.29 = $83.43 1st month's principal Month 2 $145,000 - $83.43 = $144,916.57 new balance $144,916.57 x .0875 = $12,680.20 yearly interest $12,680.20 ÷ 12 = $1,056.68 second month's interest $1,140.72 - $1,056.68 = $84.04 2nd month's principal Month 3 $144,916.57 - $84.04 = $144,832.53 new balance $144,832.53 x .0875 = $12,672.85 yearly interest $12,672.85 ÷ 12 = $1,056.07 third month's interest $1,140.72 - $1,056.07 = $84.65 3rd month's principal Month 4 $144,832.53 - $84.65 = $144,747.88 new balance $144,747.88 x .0875 = $12,665.44 yearly interest $12,665.44 ÷ 12 = $1,055.45 fourth month's interest $1,140.72 - $1,055.45 = $85.27 4th month's principal Month 5 $144,747.88 - $85.27 = $144,662.61 new balance $144,662.61 x .0875 = $12,657.98 yearly interest $12,657.98 ÷ 12 = $1,054.83 fifth month's interest $1,140.72 - $1,054.83 = $85.89 5th month's principal Total Principal Paid: $423.28 Total Interest Paid: $5,280.32

What is the capitalization rate of a property that sold for $325,000 and is producing an annual net operating income of $29,250?

Rate = Income ÷ Value Rate = $29,250 ÷ $325,000 Rate = .09 = 9 percent

A property valued at $350,000 has an annual net operating income of $43,750. What is the capitalization rate?

Rate = Income ÷ Value Rate = $43,750 ÷ $350,000 Rate = .125 = 12.5 percent

A building is producing an annual net operating income of $17,050 and has a capitalization rate of 6.2%. What is the value of the building?

Value = income ÷ rate Value = $17,050 ÷ .062 Value = $275,000

If a building is producing an annual net operating income of $34,500 and the capitalization rate is 12%, what is the value of the building?

Value = income ÷ rate Value = $34,500 ÷ .12 Value = $287,500

Hal is getting a $65,000 loan at 9% and will pay 2 discount points. What will the point cost be and what will the effective interest rate be?

point cost: $1,300 = ($65,000 x .01 x 2 points) Effective rate: 9.25% = [(2 points x .125%) + 9%]

Laura is getting an $85,000 loan at 7% interest and will pay 3 origination points. What will the point cost be and what will the effective interest rate be?

point cost: $2,550 = ($85,000 x .01 x 3 points) Effective interest rate: 7% (origination points don't change interest rate)

Bill and Jenna are getting a $175,000 loan at 8% interest and will pay 4 discount points. What will the point cost be and what will the effective interest rate be?

point cost: $7,000 = ($175,000 x .01 x 4 points) Effective interest: 8.5% = [(4 points x .125%) + 8%]

Neil and Jennifer will get a $285,000 loan at 7.5% interest and will pay 1 origination point and 2 discount points. What will the point cost be and what will the effective interest rate be?

point cost: $8,550 = ($285,000 x .01 x 3 points)* Effective rate: 7.75% = [(2 points x .125%) + 7.5%]** *three total points are being payed **only two of the points were discount points