Real Estate Finance (FIN 433) Exam 1

Question 7-6When considering an investment in "distressed" properties, what are the most important areas of research that should be considered?

(1) Market research to determine an expected future price when the investor plans to sell.(2) Title search to determine any defects in the title and/or liens as well as the cost to clear the title.

Question 2-4What does non-recourse financing mean?

The borrower is not personally liable on the note. The lender may look only to the property (security) to satisfy the loan in the event of default. Like an LLC sort of

Question 4-12 A mortgage loan is made to Mr. Jones for $30,000 at 10 percent interest for 20 years. If Mr. Jones has a choice between a CPM and a CAM, which one would result in his paying a greater amount of total interest over the life of the mortgage? Would one of these mortgages be likely to have a higher interest rate than the other?

A CPM loan reduces the principal balance more slowly, as a result, if Mr. Jones chooses a CPM, he will pay a greater amount of interest over the life of the loan. As to the contract rate of interest, the borrower's income constant, initial payments with the CAM will be higher and default risk will be greater. The initial monthly payments for a CPM are considerably less than those of a CAM. Because of lower initial payments with a CPM, this would reduce borrower default risk associated with a CPM loan. Additionally, lenders receive a greater portion of their return (interest earned) early with a CPM. By decreasing default risk a CPM may have lower rate of interest than a CAM.

Question 6-5 What is a buydown loan? What parties are usually involved in this kind of loan?

A buydown loan is a loan that has lower payments than a loan that would be made at the current interest rate. The payments are usually lowered for the first one or two years of the loan term. The payments are "bought down" by giving the lender funds in advance that equal the present value of the amount by which the payments have been reduced.

Question 2-1 Distinguish between a mortgage and a note.

A note admits the debt and generally makes the borrower personally liable for the obligation. (key word is the obligation) A mortgage is usually a separate document which pledges the designated property as security for the debt. (paying for the debt that you have on an asset?)

Question 3-9What is the sinking-fund factor? How and why is it used?

A sinking-fund factor is the reciprocal of interest factors for compounding annuities. These factors are used to determine the amount of each payment in a series needed to accumulate a specified sum at a given time. To this end, the specified sum is multiplied by the sinking-fund factor.

Question 5-7Which of the following two ARMs is likely to be priced higher, that is, offered with a higher initial interest rate?

ARM A has a margin of 3 percent and is tied to a three-year index with payments adjustable every two years; payments cannot increase by more than 10 percent from the preceding period; the term is 30 years and no assumption or points will be allowed. ARM B has a margin of 3 percent and is tied to a one-year index with payments to be adjusted each year; payments cannot increase by more than 10 percent from the preceding period; the term is 30 years and no assumption or points are allowed. ARM A is likely to be priced higher, because it has a longer-term index and adjustment period. Subsequently, the lender bears more risk and can expect a higher return.

Question 6-6 Why might a wraparound lender provide a wraparound loan at a lower rate than a new first mortgage?

Although the wraparound loan is technically a "second mortgage," the wraparound lender is only required to make payments on the existing mortgage if the borrower makes payments on the wraparound loan. Furthermore, the wraparound lender is typically taking over an existing mortgage that has a below market interest rate. Thus, the wraparound lender is benefiting from the spread between the rate being earned on the wraparound loan and that being paid on the existing loan. This allows the wraparound lender to earn a higher return on the incremental funds being advanced even if the rate on the wraparound loan is less than the rate on a new first mortgage.

Question 4-2Define amortization.

Amortization is rate at which the process of loan repayment occurs over the loan term. Types of amortization are fully, partially, zero, negative and constant rates of amortization.

Question 5-4Why do adjustable rate mortgages (ARMs) seem to be a more suitable alternative for mortgage lending than PLAMs?

An ARM provides for adjustments that are more timely for lenders than a PLAM because values for r, p, and f are revised at specific time intervals to reflect market expectations of future values for each component of i between adjustments dates.

Question 1-4 What is an abstract of title?

An abstract of title is a historical summary of the publicly recorded documents that affect title.

Question 2-10 What is a land contract?

An agreement between a buyer and seller to purchase and sell real estate. However, passage of title is usually deferred until some future date or deferred until some event or condition occurs (e.g. Payment of money, rent, etc.).

Question 3-7What is an annuity? How is it defined? What is the difference between an ordinary annuity and an annuity due?

An annuity is a series of equal deposits or payments. An ordinary annuity assumes payments or receipts occur at the end of a period. An annuity due assumes deposits or payments are made at the beginning of the period.

Question 6-4 Why might a borrower be willing to pay a higher price for a home with an assumable loan?

An assumable loan allows the borrower to save interest costs if the interest rate is lower than the current market interest rate. The investor may be willing to pay a higher price for the home if the additional price paid is less than the present value of the expected interest savings from the assumable loan.

Question 2-5What does assignment mean and why would a lender want to assign a mortgage loan?

Assignment gives the lender the right to sell or exchange a mortgage loan to another party without the approval of the borrower.

Question 4-1What are the major differences between the CAM, and CPM loans? What are the advantages to borrowers and risks to lenders for each? What elements do each of the loans have in common?

CAM - Constant Amortization Mortgage - Payments on constant amortization mortgages are determined first by computing a constant amount of each monthly payment to be applied to principal. Interest is then computed on the monthly loan balance and added to the monthly amount of amortization to determine the total monthly payment. CPM - Constant Payment Mortgage - This payment pattern simply means that a level, or constant, monthly payment is calculated on an original loan amount at a fixed rate of interest for a given term.CAM - lenders recognized that in a growing economy, borrowers could partially repay the loan over time, as opposed to reducing the loan balance in fixed monthly amounts.CPM - At the end of the term of the mortgage loan, the original loan amount or principal is completely repaid and the lender has earned a fixed rate of interest on the monthly loan balance. However the amount of amortization varies each month.When both loans are originated at the same rate of interest, the yield to the lender will be the same regardless of when the loans are repaid (i.e., early or at maturity).

Question 4-4 What are loan closing costs? How can they be categorized? Which of the categories influence borrowing costs and why?

Closing costs are incurred in many types of real estate financing, including residential property, income property, construction, and land development loans.Categories include: statutory costs, third party charges, and additional finance charges.Closing costs that do affect the cost of borrowing are additional finance charges levied by the lender. These charges constitute additional income to the lender and as a result must be included as a part of the cost of borrowing. Lenders refer to these additional charges as loan fees.

Question 3-6 What are the interest factors (IFs) in Exhibit 3-9? How are they developed? How may financial calculators be used to calculate IFs in Exhibit 3-9?

Compound interest factors for the accumulation of $1 per period, e.g., $1 x [1 + (1+i) + (1+i)2 ...] etc. Calculators may be used by entering $ 1 values for PMT, entering the desired values for n and i then solving for FV.

Question 3-2How are the interest factors (IFs) Exhibit 3-3 developed? How may financial calculators be used to calculate IFs in Exhibit 3-3?

Computed from the general formula for compounding for monthly compounding for various combinations of "i" and years. FV = PV x (1+i)n. Calculators can be used by entering $ 1 for PV, the desired values for n and i and solving for FV.

Question 2-7What does default mean? Does it occur only when borrowers fail to make scheduled loan payments?

Default means that the borrower has failed to (1) make scheduled loan payments or (2) violated on a provision in the note or mortgage.

Question 2-9What does deficiency judgment mean?

Deficiency judgement: If default occurs and the property is sold, if the dollars from the sale is not enough to pay off the loan balance, the borrower is liable for the difference.

Question 3-8 How must one discount a series of uneven receipts to find PV?

Each periodic cash receipt or payment must be discounted individually then summed to obtain present value. That is: PV= CF1 (1/1 + i)1 + CF2 (1/1+ i)2 ....+ CFn (1/1 + i)n where CF is cash inflow and i equals the discount rate.

Question 1-2 What is meant by an estate? Why are estates important in real estate finance?

Estate is used to denote a possessory or potentially possessory interest in real estate. However, not all interests in real property are estates. Ownership can be quite different from possession and a variety of legal factors affect the ownership rights associated with real estate. The economic benefits expected by lenders, investors, and other parties in real estate transaction are affected by these legal factors.

Question 7-3What are the capital gains rules as applied to residential property owners?

For sales of personal residence a homeowner may exclude from income $250,000 of gain, and a married couple may exclude up to $500,000 of gain realized on the sale.(1)Individual must have owned and used the home as a principal residence for at least two of the five years prior to the sale (the two years do not have to be consecutive).(2)Exclusion applies to only one sale every two years.

Question 2-13What is meant by mortgage foreclosure, and what alternatives are there to such action?

Foreclosure involves the sale of property by the courts to satisfy the unpaid debt. Alternatives: 1. Restructuring the mortgage loan 2. Transfer of the mortgage to a new owner3. Voluntary conveyance of the title to the mortgagee 4. A "friendly" foreclosure 5. A prepackaged bankruptcy

Question 5-8What are forward rates of interest? How are they determined? What do they have to do with indexes used to adjust ARM payments?

Forward rates are based on future interest rate expectations that are implicit in the yield curve and reveal investor expectations of interest rates between any two maturity periods on the yield curve. For example, the yield for a security maturing one year from now is 8 percent, and the yield for a security that matures two years from now is 9 percent. Based on these two yields, we can compute a forward rate, or rate that an investor who invests in a one-year security can expect to reinvest funds for one additional year. This forward rate will be 10 percent because if investors have the opportunity to invest today in either the one- or the two-year security and are indifferent between the two choices, the investor buying a one-year security must be able to earn 10 percent on funds available for reinvestment at the end of year 1. This information is important and represents a reference point that may help lenders and borrowers when pricing ARMs and calculating expected yields at the time ARMs are made. Additionally, interest rate series, which may include forward rates of interest, comprise the indexes used to adjust ARMs. This is especially true, if an index is long term in nature.

Question 1-5 Name the three general methods of title assurance and briefly describe each. Which would you recommend to a friend purchasing a home? Why?

General Warranty Deed - the grantor warrants that the title he/she conveys to the property is free and clear of all encumbrances (guessing like water damage), other than those that are specifically listed in the deed. Special Warranty Deed - makes the same warranties as a general warranty deed except that it limits their application to defects and encumbrances which occurred only while the grantor held title to the property. (Like General Warranty with strings attached) Quitclaim Deed - offers the grantee the least protection in that it simply conveys to the grantee whatever rights, interests, and title that the grantor may have in the property. No warranties are made about the nature of these rights and interests or of the quality of the grantor's title to the property. (Same status as the owner) Would recommend the General Warranty Deed, because it offers the most comprehensive warranties about the quality of the title.

Question 6-7 Assuming the borrower is in no danger of default, under what conditions might a lender be willing to accept a lesser amount from a borrower than the outstanding balance of a loan and still consider the loan paid in full?

If interest rates have risen significantly, the market value of the loan will be less. Thus, the lender may be willing to accept less than the outstanding balance of the loan, especially if the lender still receives more than the market value of the loan. The lender can then make a new loan at the higher market interest rate.

Question 2-8When might a borrower want to have another party assume his liability under mortgage loan?

If the loan was made with a favorable interest rate, the seller of the property may want to include this low rate loan as an additional incentive to sell the property. Int. Rate, low rate will give more incentive to sell property

Question 2-14Explain the difference between a buyer assuming the mortgage and taking title "subject to" the mortgage.

If the purchaser acquires the property "subject to" the existing debt, he does not acquire any personal liability for the debt. When a mortgage is assumed the original borrower may be released from any obligations to the lender.

Question 4-11An expected inflation premium is said to be part of the interest rate, what does this mean?

In general, the nominal interest rates for a specified period (say 10 years) is said to be a composite of three things; (a) real return-such as the growth rate in real GDP (underlying economic growth in the economy, (b) expected inflation , and (c) premium for risk. For example, if a lender quotes a 6% rate on a mortgage loan at a time when 10 year U.S. government bonds are yielding 3.6%, then the risk premium would be 2.4%. If at that same time growth in real GDP is 2.0% and is expected to continue at that rate for 10 years, then expected inflation can be estimated to be 1.6% (or 6%-2.4%-2.0% = 1.6%).Alternatively, if 10 year U.S. Government Bonds that are indexed for inflation (TIPs) are currently yielding 2.0% and 10 year Treasuries not indexed for inflation are yielding 3.6%, the difference, or 3.6%-2.0%, or 1.6% is an estimate of expected inflation.

Question 5-5 List each of the main terms likely to be negotiated in an ARM. What does pricing an ARM using these terms mean?

Initial interest rate, index, adjustment interval, margin, composite rate, limitations or caps, negative amortization, floors, assumability, discount points, prepayment privilege. Anytime the process of risk bearing is analyzed, individual borrowers and lenders differ in the degree to which they are willing to assume risk. Consequently, the market for ARMs contains a large set of mortgage instruments that differ with respect to how risk is to be shared between borrowers and lenders. The terms listed above are features that might be used in pricing an ARM and establishing the bearing of risk.

Question 5-6 What is the difference between interest rate risk and default risk? How do combinations of terms in ARMs affect the allocation of risk between borrowers and lenders?

Interest rate risk is the risk that the interest rate will change at some time during the life of the loan. Default risk is the risk to the lender that the borrower will not carry out the full terms of the loan agreement. The fact that ARMs shift all or part of the interest rate risk to the borrower, the risk of default will generally increase to the lender, thereby reducing some of the benefits gained from shifting interest rate risk to borrowers.

Question 4-6Why do lenders charge origination fees, especially loan discount fees?

Lenders usually charge these costs to borrowers when the loan is made, or "closed", rather than charging higher interest rates. They do this because if the loan is repaid soon after closing, the additional interest earned by the lender as of the repayment date may not be enough to offset the fixed costs of loan origination.

Question 2-11How can mechanics' liens achieve priority over first mortgages that were recorded prior to the mechanics' lien?

Mechanics' liens are permitted to be recorded after the fact. State laws generally give contractors, laborers, or suppliers of materials a certain period of time following the completion of work or delivery of materials during which to file their lien. When the lien is filed it relates back and takes priority over all liens filed after the time when materials were first delivered or work was first performed on real estate.

Question 7-5What are public goods? How may they be reflected in house prices?

Public goods include education, police, fire, health and other services provided by the local public sector. To the extent the quality/value of these services provided to homeowners exceed the cost (taxes, fees), paid, a net benefit is thought to exist. This net benefit is generally reflected in land/property prices.

Question 5-2How do inflationary expectations influence interest rates on mortgage loans?

Most savings institutions had been making constant payment mortgage loans with relatively long maturities, and the yields on those mortgages did not keep pace with the cost of deposits. These problems prompted savings institutions (lenders) to change the mortgage instruments to now make more mortgages with adjustable interest rate features that will allow adjustments in both interest rates and payments so that the yields on mortgage assets will change in relation to the cost of deposits.

Question 4-13 What isnegative amortization?

Negative amortization means that the loan balance owed increases over time because payments are less than interest due.

Question 4-5 In the absence of loan fees, does repaying a loan early ever affect the actual or true interest cost to the borrower?

No, the true interest rate always equals the contract rate of interest.

Question 2-3 Can borrowers pay off, part or all, of loans anytime that they desire?

No. In general, prepayment is a privilege not a right. In cases of residential/consumer loans made by federally related lenders, this option is usually provided to borrowers. In commercial real estate loans it is not.

Question 2-6What is meant by a "purchase money" mortgage loan? When could a loan not be a purchase money mortgage?

Purchase money means funds from the loan will be used to purchase a property. It will not provide funds for other uses such as could be the case with a refinancing.

Question 5-3How does the price level adjusted mortgage (PLAM) address the problem of uncertainty in inflationary expectations? What are some of the practical limitations in implementing a PLAM program?

One concept that has been discussed as a remedy to the imbalance problems for savings institutions is the price level adjusted mortgage (PLAM). To help reduce interest rate risk, or the uncertainty of inflation and its effect on interest rates, it has been suggested that lenders should originate mortgages at interest rates that reflect expectations of the real interest rate plus a risk premium for the likelihood of loss due to default on a given mortgage loan.Should prices of other goods, represented in the CPI increase faster than housing prices, indexing loan balances to the CPI could result in loan balances increasing faster than property values. If this occurred, borrowers would have an incentive to default. A second problem with PLAMs has to do with the relationship between mortgage payments and borrower incomes. Should inflation increase sharply, it is not likely that borrower incomes would increase at the same rate in the short run. During short periods, the payment burden may increase and households may find it more difficult to make mortgage payments. A third problem with PLAMs is that the price level chosen for indexation is usually measured on a historical basis. In other words, the index is based on data collected in the previous period but published currently.

Question 5-9Distinguish between the initial rate of interest and expected yield on an ARM. What is the general relationship between the two? How do they generally reflect ARM terms?

One important issue in ARMs is the yield to lenders, or cost to borrowers, for each category of loan. Given the changes in interest rates, payments, and loan balances, it is not obvious what these yields (costs) will be. This means that the costs of each category of loan will be added to the initial interest rate, thus producing an expected yield.

Question 4-14 What is partial amortization?

Partial amortization occurs when payments exceed interest due but not by enough to reduce the amount owed to zero at maturity.

Question 7-4List four important drivers of housing demand and price appreciation.

Population growth, income, households, price of rental housing

Question 1-1 What is the difference between real property and personal property?

Real property refers to the ownership rights associated with realty. Realty refers to land and all things permanently attached. Personal property refers to ownership rights associated with personalty. Personalty are all things, tangible, intangible that are movable. This includes all things that are not realty.

What is the acceleration clause?

The acceleration clause gives the lender the right or option to demand the loan balance owed if a default occurs. Forbearance by the lender allows the borrower time to cure a deficiency without the lender giving up the right to foreclose at a future time. Clause which allows lender to demand accelerated payment of loan

Question 4-10What is the accrual rate and payment rate on a mortgage loan?

The accrual rate is usually the nominal rate divided by the number of periods within a year that will be used to calculate interest. For example, if interest is to be accrued monthly, the nominal rate is divided by 12; if daily, the nominal rate is divided by 365. The payment rate, or "pay rate", is the % of the loan to be paid at time intervals specified in the loan agreement. This rate is used to calculate payments which are usually made monthly (but could be quarterly, semi-annual, etc.) If the pay rate exceeds the accrual rate, this indicates that some loan repayment (amortization) is occurring. When it is equal to the accrual rate, amortization is not occurring, etc.

Question 6-3 Why might the market value of a loan differ from its outstanding balance?

The balance of a loan depends on the original contract rate, whereas the market value of the loan depends on the current market interest rate.

Question 6-1 What are the primary considerations that should be made when refinancing?

The borrower must determine whether to present value of the savings in monthly payments is greater than the refinancing costs (points, origination fees, costs of (1) appraisal, (2) credit reports, (3) survey, (4) title insurance, (5) closing fees, etc.

Question 3-1What is the essential concept in understanding compound interest?

The concept of earning interest on interest is the essential idea that must be understood in the compounding process and is the cornerstone of all financial tables and concepts in the mathematics of finance.

Question 3-5How does discounting, as used in determining present value, relate to compounding, as used in determining future value? How would present value ever be used?

The discounting process is a process that is the opposite of compounding. To find the present value of any investment is simply to compound in a "reverse" sense. This is done by taking the reciprocal of the interest factor for the compound value of $1 at the interest rate, multiplying it by the future value of the investment to find its present value.Present value is used to find how much should be paid for a particular investment with a certain future value at a given interest rate.

Question 2-16What is the difference between the equity of redemption and statutory redemption?

The equity of redemption is the right of a mortgagor to redeem his/her property from default during the period from the time of default until foreclosure proceedings are begun.Statutory redemption is the right to redeem after foreclosure.

Question 6-8 Under what conditions might a home with an assumable loan sell for more than comparable homes with no assumable loans available?

The home with an assumable loan might be expected to sell for more than comparable homes with no assumable loans available when the contract interest rate on the assumable loan is significantly less than the current market rate on a loan with similar maturity and similar loan-to-value ratio. Note that if the dollar amount of the assumable loan is significantly less than that which could be obtained with a market rate loan, the benefit of the assumable loan is diminished because the borrower may need to make up the difference with a second mortgage.

Question 6-10 Is the incremental cost of borrowing additional funds affected significantly by early repayment of the loan?

The incremental cost of borrowing additional funds can be affected significantly by early repayment of the loan, especially if additional points were paid to obtain the additional funds. Thus, the borrower should consider how long he or she expects to have the loan when calculating the incremental cost of the additional funds.

Question 6-9 What is meant by the incremental cost of borrowing additional funds?

The incremental cost of borrowing funds is a measure of what it really costs to obtain additional funds by getting a loan with a higher loan-to-value ratio that has a higher interest rate. This measure is important because the contract rate on the loan with the higher loan-to-value ratio does not take into consideration the fact that this higher rate must be paid on the entire loan - not just the additional funds borrowed. Thus, the borrower should consider the incremental cost of the additional funds to know what it is really costing to borrow the additional funds.

Question 5-10If an ARM is priced with an initial interest rate of 8 percent and a margin of 2 percent (when the ARM index is also 8 percent at origination) and a fixed rate mortgage (FRM) with constant payment is available at 11 percent, what does this imply about inflation and the forward rates in the yield curve at the time of origination? What is implied if a FRM were available at 10 percent? 12 percent?

The initial interest rate and expected yield for all ARMs should be lower than that of a FRM on the day of origination. The extent which the initial rate and expected yield on an ARM will be lower than that on a FRM or another ARM, depends on the terms relative to payments, caps, etc. One would expect the difference between interest rates at the point if origination to reflect expectations of inflation and forward rates as well. As a FRM's interest rate increases from 11 percent to 10 percent and 12 percent, greater inflation and/or greater uncertainty with respect to inflation is implied

Question 3-10What is an internal rate of return? How is it used? How does it relate to the concept of compound interest?

The internal rate of return integrates the concepts of compounding and present value. It represents a way of measuring a return on investment over the entire investment period, expressed as a compound rate of interest. It tells the investor what compound interest rate the return on an investment being considered is equivalent to.

Question 4-3Why do the monthly payments in the beginning months of a CPM loan contain a higher proportion of interest than principal repayment?

The reason for such a high interest component in each monthly payment is that the lender earns an annual percentage return on the outstanding monthly loan balance. Because the loan is being repaid over a long period of time, the loan balance is reduced only very slightly at first and monthly interest charges are correspondingly high.

Question 2-15What dangers are encountered by mortgagees and unreleased mortgagors when property is sold "subject to" a mortgage?

The mortgagor will be responsible if the person acquiring the property subject to the mortgage defaults. In turn, if the original mortgagor then defaults, the bank will have to foreclose on the property which may not be worth what is left to pay on the mortgage.

Question 1-3 How can a leased fee estate have a value that could be transferred to another party?

The original fee owner can give up some property rights to a lessee. The value of the leased fee estate will depend on the amount of lease payments expected during the term of the lease plus the value of the property when the lease terminates and the original owner receives the reversionary interest. Like a land-lord tenant relationship

Question 6-2 What factors must be considered when deciding whether to refinance a loan after interest rates have declined?

The payment savings resulting from the lower interest rate must be weighed against the costs associated with refinancing such as points on the new loan or prepayment penalties on the loan being refinanced.

Question 5-1 In the previous chapter, significant problems regarding the ability of borrowers to meet mortgage payments and the evolution of fixed interest rate mortgages with various payment patterns were discussed. Why didn't this evolution address problems faced by lenders? What have lenders done in recent years to overcome these problems?

These inadequacies stem from the fact that although payment patterns can be altered to suit borrowers as expectations change, the CAM, CPM, and GPM are all originated in fixed interest rates and all have predetermined payment patterns. Neither the interest rate nor the payment patterns will change, regardless of economic conditions.A variety of mortgages are now made with either adjustable interest rates or with variable payment provisions that change with economic conditions.

Question 4-8What is the effective borrowing cost (rate)?

This differs from the contract rate because it includes financing fees (points, origination). It differs from the APR because the latter is calculated assuming that the loan is repaid at maturity. When calculating the effective cost, the expected repayment or payoff date must be used. The latter is usually sooner than the maturity date.

Question 4-9What is meant by the "nominal rate" on a mortgage loan?

This rate is usually quoted as an annual rate, however the time intervals used to accrue interest is generally not quoted explicitly. Further, the rate generally does not specify the extent of any origination fees and/or discount points.

Question 3-4What does the time value of money (TVM) mean?

Time value simply means that if an investor is offered the choice between receiving $1 today or receiving $1 in the future, the proper choice will always be to receive the $1 today, because that $1 can be invested in some opportunity that will earn interest. Present value introduces the problem of knowing the future cash receipts for an investment and trying to determine how much should be paid for the investment at present. When determining how much should be paid today for an investment that is expected to produce income in the future, we must apply an adjustment called discounting to income received in the future to reflect the time value of money.

Question 4-7What is the connection between the Truth-in-Lending Act and the annual percentage rate (APR)?

Truth-in-Lending Act - the lender must disclose to the borrower the annual percentage rate being charged on the loan.The APR reflects origination fees and discount points and treats them as additional income or yield to the lender regardless of what costs the fees are intended to cover. The APR is always calculated assuming that the loan is repaid at maturity.

Question 7-1Why is the income approach to value often difficult to use on a single family residential appraisal?

Typically, the income approach is difficult to use because the sale of single family, rental properties are rare in the area.

Question 7-2What are the differences between the cost and sales comparison approaches to appraising property?

When using the market approach, the appraiser estimates the value of a property by comparing the selling prices of properties similar to, and near, the property being appraised. Because no two properties are exactly alike, the values of similar properties are adjusted by the appraiser for dissimilarities. When using the cost approach, the appraiser establishes a value for the site on which the improvement is located, then determines the cost of reproducing the improvements and adds the two. After the costs of the improvement and land value are added, the appraiser deducts an amount for any depreciation that improvements have suffered since they were constructed.

Question 3-3 What general rule can be developed concerning maximum values and compounding intervals within a year? What is an equivalent annual yield?

Whenever the nominal annual interest rates offered on two investments are equal, the investment with the more frequent compounding interval within the year will always result in a higher effective annual yield. An equivalent annual yield is a single, annualized discount rate that captures the effects of compounding (and if applicable, interest rate changes).

Question 1-6 Would it be legal for you to give a quitclaim deed for the Statue of Liberty to your friend?

Yes, the quitclaim deed simply says that the grantor "quits" whatever claim he has in the property (which may well be none) in favor of the grantee. You technically can, but doesn't really mean that you're really giving full ownership