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Lecture 13 Introduction To Real Estate Finance (MS PowerPoint)

This document provides an overview of real estate finance concepts including equity capital versus debt capital, fixed-rate mortgages and how they are amortized, legal issues related to mortgages such as foreclosure processes, and optional types of loans such as refinancing. Key points covered include how equity capital comes from personal funds and debt capital from borrowed funds, the process of allocating monthly mortgage payments between interest and principal, and factors to consider when deciding whether to refinance a mortgage.

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minani marc
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47 views

Lecture 13 Introduction To Real Estate Finance (MS PowerPoint)

This document provides an overview of real estate finance concepts including equity capital versus debt capital, fixed-rate mortgages and how they are amortized, legal issues related to mortgages such as foreclosure processes, and optional types of loans such as refinancing. Key points covered include how equity capital comes from personal funds and debt capital from borrowed funds, the process of allocating monthly mortgage payments between interest and principal, and factors to consider when deciding whether to refinance a mortgage.

Uploaded by

minani marc
Copyright
© © All Rights Reserved
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Lecture 13

Introduction to
Real Estate Finance
Equity Capital v. Debt Capital

Equity Capital: Personal funds, earned value

Debt Capital: Borrowed Funds


Equity Capital v. Debt Capital

Total Capital, or
Purchase Price, or
Property Value

Equity Capital, or Debt Capital, or


Down Payment, or
Equity Interest
+ Mortgage Loan, or
Loan Balance
Equity Capital (“Down Payment”)
 Savings
– Funds saved for real estate investments/use
 Unsecured Loan
– No collateral required
 Secured Loan
– Collateral required (stocks, other real estate, cars, etc.)
 Sweat Equity
– Non-monetary participation in a real estate property or
transaction
Debt Capital

Mortgage

Mortgagor: Creates debt, promises to


repay, gives security instrument to
lender

Mortgagee: Receives security


instrument, accepts borrower’s offer to
create and repay financial obligations
Debt Capital: Fixed-Rate Mortgages

 Mortgage interest rate is common throughout the term of the


mortgage
 Loan maturity date set at loan origination, and does not change
during the duration of the loan (unless prepayment occurs)
 P & I payments remain constant throughout the life of the loan
 Amortization: Loan is fully repaid at the end of loan duration (no
balance due)
Debt Capital: Fixed-Rate Mortgages

PRINCIPAL + INTEREST = DEBT SERVICE

Key to Amortization: As the loan period moves towards maturity, a


greater allocation of the debt service is allocated to principal
instead of interest. In other words, you pay less interest on the
loan as the loan matures.
FRM: Amortization of Debt Service
FRM: Amortization Calculations

EXAMPLE LOAN ASSUMPTIONS:

Loan Amount: $100,000


Interest Rate: 8.0%
Term to Maturity: 30 Years
Monthly Debt Service: $733.76
Frequency of Debt Service: MONTHLY
FRM: Amortization Calculations

Step One: Calculate the “debiting factor” for the loan

Monthly Debiting Factor = Annual Interest Rate


# of Payments/Year

For Example: 0.08 / 12 = 0.006666667


FRM: Amortization Calculations

Step Two: Determine allocation for Mortgage Interest

$100,000 Loan Balance for Month One


x 0.0066667 Debiting Factor
$ 666.67 Mortgage Interest for Month One
FRM: Amortization Calculations

Step Three: Determine allocation for Mortgage Principal

$733.76 Monthly Debt Service


- $666.67 Mortgage Interest for Month One
$ 67.09 Mortgage Principal for Month One
FRM: Amortization Calculations

Step Four: Calculate New Loan Balance

$100,000 Loan Balance for Month One


-$ 67.09 Principal Amortization for Month One
$ 99,933 Loan Balance for Month Two
FRM: Amortization Calculations

CALCULATE AMORTIZATION ALLOCATIONS FOR


MONTH TWO, AND THE NEW LOAN BALANCE FOR
MONTH THREE
FRM: Amortization Calculations

Step One: Calculate the “debiting factor” for the loan

Monthly Debiting Factor = Annual Interest Rate


# of Payments/Year

For Example: 0.08 / 12 = 0.006666667


REMAINS CONSTANT
FRM: Amortization Calculations

Step Two: Determine allocation for Mortgage Interest

$ 99,933 Loan Balance for Month Two


x 0.0066667 Debiting Factor (remains constant)
$ 666.22 Mortgage Interest for Month Two
FRM: Amortization Calculations

Step Three: Determine allocation for Mortgage Principal

$733.76 Monthly Debt Service


- $666.22 Mortgage Interest for Month Two
$ 67.57 Mortgage Principal for Month Two
FRM: Amortization Calculations

Step Four: Calculate New Loan Balance

$ 99,933 Loan Balance for Month Two


-$ 67.54 Principal Amortization for Month Two
$ 99,865 Loan Balance for Month Three
FRM: Amortization Calculations

MONTH ONE MONTH TWO

Loan Balance: $100,000 $99,933

Mortgage Interest: $ 666.67 $666.22

Mortgage Principal: $ 67.09 $ 67.54


Amortization Schedule
Lecture 13

Legal Issues of
Mortgage Loans
Foreclosure:
Title Theory v. Lien Theory States

Title Theory: Legal title conveyed to the lender to


secure the debt, but the mortgagor (borrower) retains
possession and equitable title.

Lien Theory: Mortgagor holds the legal and equitable


title and gives the lender a lien (claim) against the
property. **Florida is a lien theory state**
Loan Assumption and Assignment

Assumption: Occurs when a buyer purchases equity in


real estate, and takes over (“assumes”) the payments
due on a remaining loan balance

– Qualifying vs. Non-Qualifying

Assignment: Occurs when a lender sells a loan to


another lender
Lecture 13

“Mortgage” v
“Promissory Note”
Mortgage v. Promissory Note

Mortgage Note

The legal instrument giving the lender


Serves as evidence of debt and is the
the right to sell the real estate if a
borrower’s personal IOU to repay
borrower defaults on the loan.

Four Requirements:
1. Competent Parties
2. Consideration
3. Object of the contract is Legal
4. Meeting of the minds (offer/accept.)
Lecture 13

Optional Types of
Loans
Some Optional Loan Types
 Blanket Mortgage
– Used for several parcels of property
– Release Clause
 Package Mortgage
– Loans for both real estate and personal property
 Open-End Mortgage
– Provides for future advances of additional funds
– Used in “Fast Track” construction
 Seller Financing
Lecture 13

Obtaining the
Benefits of Lower
Interest Rates
Refinancing

“Taking out a replacement mortgage at prevailing market


interest rates and using at least part of the money
from the new loan to repay the current mortgage
indebtedness.”
Benefits of Refinancing

 Lower Interest Rate


– Lower monthly debt service
– Lower debt service allows borrowers to decrease loan
durations, whereby paying off loan earlier

 Money to pay off other debts

 Money for Capital Improvements or other investments


Costs of Refinancing

 Loan Origination Fees (optional)


 Credit Report
 Appraisal
 Legal Fees
 Discount Points (optional)

These fees can typically be paid in cash or “rolled into” the loan
amount
Feasibility of Refinancing

 Savings in monthly payments w/ new loan


 Any increases in up-front cash available if new loan is greater
than existing
 Up-front closing costs required
 Borrower’s income due to associated income tax consequences
 Investment opportunities available to borrower
 How long borrower expects to keep the loan
 Prepayment penalties on existing loan

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