FIN 413 Exam 1
After Bill purchases a home he discovers that his neighbor's fence encroaches on his property. Bill then notifies his neighbor that he must remove and realign his fence to eliminate the encroachment. His neighbor refuses. What legal standing does Bill have to enforce the removal of the fence? Assume that the neighbor's fence has been in place for 50 years. What rights might the neighbor have to keep the fence in place?
Bill has the right of absolute ownership to enforce the removal of the fence. If the neighbor's fence has been in place for 50 years than Bill loses the right of absolute ownership through adverse possession and the neighbor would become the owner of the property on his side of the fence.
Explain the difference between an easement appurtenant and an easement in gross.
Easement appurtenant takes place between two adjacent properties - dominant estate and servient estate. An example of an easement appurtenant is a driveway over a neighbor's land to reach your property. An easement in gross grants specific property uses to individual entities rather than to a property. An example of an easement in gross is granting a utility company the right to run pipes under your land.
FHA insured mortgages
Federal Housing Administration (FHA): Made for those who typically don't qualify for a conventional loan, must pay 0.85% upfront PMI fee along with regular PMI throughout the life of the loan, typically 3.5% down payment (though sometimes can be 0%), those with bad credit are still considered, cannot rent out property during the first year.
Explain primary differences between the conforming and nonconforming mortgage market
In essence, conforming mortgages are any mortgages that are typically bought by Fannie May or Freddie Mac in the secondary market. Jumbo loans are the most common type of non-conforming conventional loans. For a loan to qualify as conforming, it must meet all of the following characteristics: (1) At least 5% down payment, (2) max loan amount is $417,000 (unless in a "high cost" area), (3) Private Mortgage Insurance is waived if 20% or more down payment is made, (4) typically have a front end and back end ratio requirements to meet, and (5) borrower should have a "prime" credit score (660+).
VA guaranteed mortgages
Loans made possible for veterans looking to purchase property, possible 100% financing (no down payment), and upfront fees, no front and back end requirements as in Conventional or FHA, non-prime credit scores still considered, no PMI required for this loan.
What is PMI and why is it important to the mortgage lending market?
PMI stands for Private Mortgage Insurance. Most mortgage lenders require PMI if more than 80% of Loan to Value is borrowed. PMI is usually amortized into the monthly payments of the loan. For conventional loans, PMI is terminated once equity value 22% or more (<78% Loan to Value). PMI is important it allows mortgage lending to those who can't make a 20+% down payment on the property.
Use a simple sketch to show the location of section 17 in a township.
Solution: 6 5 4 3 2 1 7 8 9 10 11 12 18 17 16 15 14 13 19 20 21 22 23 24 30 29 28 27 26 25 31 32 33 34 35 36
You are asked by an investor to help identify and otherwise describe some properties. Begin by making a square on a sheet of paper to represent Section 31, T2N, R5W, which is where the parcels are located. Sketch the parcels of land with the section: a. NE1/4 b. SE1/4 of the SE1/4 c. W1/2 of the NW1/4 of the SW1/4 d. SW1/4 of the NW1/4 of the NW1/4 e. W1/2 of the NE1/4 of the NE1/4 of the NW1/4 How many acres are there in each parcel?
Solution: a. 160 b. 40 c. 20 d. 10 e. 5
Bill and Ami borrowed $220,000 at 9 percent interest using a fixed rate mortgage with a maturity of 25 years. Answer the following questions about their loan. a. What is the monthly payment necessary to amortize this loan? b. If the loan required annual payments instead of monthly, what would the annual payment be? c. Multiply the answer in part (a) by 12. Why does this amount not equal the answer in part b?
Solution: (a) pmt = $1,846.33 (b) pmt = $22,397.38 (c)12 x $1,846.33 = $22,155.96 The amount is less than the answer to part B because of the value of compound interest. In this case the monthly payment schedule reduced the outstanding balance each month and interest was not collected for the remainder of the year on the principal paid.
According to the rectangular survey system, if a buyer purchases the south half of the northeast quarter of a section of land, how many acres has he or she purchased?
Solution: 640/4/2 = 80 acres
Joe Saver deposits $5,000 in the Granite City Savings and Loan. To what value will his money accumulate in five years if the account pays 5 percent interest compounded annually? (Future Value of a Lump Sum)
Solution: FV = PV ( 1+ i)n FV = $5,000 (1.05)^5 FV = $6,381.41
Joe expects to receive $5,000 each year for the next ten years beginning one year from today. If he deposits each payment into an account earning 8 percent interest annually, what will the balance of the account be when the last payment is deposited? (Future Value of an Annuity)
Solution: FVA = $72,432.81
Harry sells Mary an easement to run a driveway across his property. Who has the dominant estate and who has the servient estate? Explain your answer. Is this an easement appurtenant or an easement in gross?
Solution: Mary has the dominant estate and Harry has the servient estate because Harry is granting the owner of the dominant estate the right to use his property. This is an example of an easement appurtenant.
An investor is considering purchasing a small retail property at a price of $820,000. The investor has established a required rate of return of 14 percent. Based on the following cash flow forecast, what is the NPV of this investment opportunity? Cash flows: year 1 = 100,000; year 2 = 120,000; year 3 = 110,000; year 4 = 140,000; year 5 = 950,000. Should the investor purchase this property? What is the IRR?
Solution: NPV= PVinflows - PVoutflows NPV = $10,593.74 Yes, the project has a positive NPV. Solution: IRR = 14.37%
How much should Joe be willing to pay today for an investment that is expected to pay $5,000 ten years in the future if he requires a 10 percent rate of return? (Present Value of a Lump Sum)
Solution: PV = FV/ (1 + i)^n PV = $5,000/(1.10)^10 PV = $1,927.72
Joe is offered the opportunity to receive $5,000 each year for ten years. How much would he be willing to pay for this future income stream if he desires a 10 percent return? (Present Value of an Annuity)
Solution: PVA = $30,722.84
Harold and Helen purchase a $180,000 house using a down payment of $15,000 and a fixed rate mortgage for $165,000. The annual interest rate on the loan is 10 percent and the term is 30 years. What monthly payment is necessary to amortize this loan?
Solution: Pmt = $1,447.99
Joe hopes to accumulate $200,000 with ten annual deposits into a savings account earning 6 percent interest annually. What amount must Joe deposit each year to achieve his objective? (Sinking Fund Payment)
Solution: SFP = $15,173.59
How many square feet are in an acre? How many acres are in a section? How many sections are in a township?
Solution: There are 43,560 square feet in an acre. There are 640 acres in each full section. There are 36 sections in each full township.
Consider a borrower who has gross annual income of $48,000 and is applying for a mortgage that requires monthly payments of $1,040. Property taxes and insurance premiums for the pledged property total $1,200 per year. The borrower has no other outstanding loans on the property, but she has 24 monthly payments of $260 on her car loan. Calculate the front-end and back-end ratios for this borrower. Given the industry benchmarks of 28% and 36% respectively for these ratios, would this borrower qualify for a mortgage
Solutions: Front End ratio: = Total monthly payment (PITI) / Monthly pre-tax gross income = $1,040 + ($1,200/12) / ($48,000 / 12) = $1,140 / $4,000 = 28.5% Back End ratio: = (PITI + other monthly obligations) / Monthly pre-tax income = ($1,040 + ($1,200/12) + $260) / $48,000 / 12 = $1,400 / $4,000 = 35% The borrower would not qualify given her Front End ratio surpasses the industry benchmark.
IRR decision rule
The IRR decision rule states that investors should choose to accept those projects that have an IRR greater or equal to their required rate of return.
Net present value
The difference between what an investment is worth to an investor and how much it costs. All dollars are measured in present value dollars
Internal rate of return
The discount rate that makes the NPV exactly equal to zero.
What is the maximum LTV ratio permitted on a conventional mortgage to avoid PMI?
The max LTV ratio for a conventional mortgage is 80% in order to PMI to be waived.
conventional mortgages
Upfront origination fees, can get out of mortgage insurance with 20% or more down payment, rates are typically competitive, usually between 5-20% required down payment, about 80% of mortgages are conventional
From reference mark located in front of courthouse steps in Provo, Utah County, Utah, proceed east 150 feet to P.O.B. thence east 200 feet; thence south 300 feet; thence south 45 degrees west 141.421 feet; thence west 100 feet; thence north 400 feet to P.O.B. Assignment: Sketch boundaries and calculate the number of acres.
sketch
NPV decision rule
—The net present value decision rule states that investors should choose to accept those projects which are worth more than they cost, with both inflows and outflows measured in present value dollars. The NPV calculation takes into account the time value of money, as well as investors' risk preferences.
