Question Description
I'm working on a real estate question and need an explanation and answer to help me learn.
1. With all other variables remaining equal, rank the payment amounts from lowest to highest for the following types of mortgages (interest only, fully amortized, partially amortized, negatively amortized)
2. Which of the loan types in question 1 has the most lender risk? Why?
3. What type of estate is a freehold estate that lasts only as long as the life of the owner of the estate or the life of some other person.
4. Mr. Smith acquired a property consisting of one acre of land and a twostory building five years ago for $100,000. He also obtained an $80,000 mortgage loan from ACE Bank to provide financing to complete the purchase. This year, Mr. Smith constructed another building on the property with his own funds at a cost of $20,000. Mr. Smith has decided after completing the building to approach Duce Bank to borrow against his property with a $16,000 second mortgage. Is Duce Bank likely to provide the $16,000 in financing? Explain why or why not. Assuming Duce Bank does provide the financing, is the rate likely to be higher or lower than the initial $80,000 mortgage? Explain why or why not.
5. What does the time value of money (TVM) mean?
6. Jones can deposit $6,000 at the end of each six-month period for the next 12 years and earn interest at an annual rate of 8 percent, compounded semiannually. What will the value of the investment be after 12 years? If the deposits were made monthly instead ($1,000/mo) and compounded monthly, what would the value of the investment be after 12 years?
7. John is considering the purchase of a lot. He can buy the lot today and expects the price to rise to $15,000 at the end of 10 years. He believes that he should earn an investment yield of 8 percent compounded annually on his investment. The asking price for the lot is $7,000. Should he buy it? What is the internal rate of return compounded annually on the investment if John purchases the property for $7,000 and is able to sell it 10 years later for $15,000?
Explanation & Answer
Please view explanation and answer below.
1
Finance Problem set
Student’s Name
Institution
Course: course code
Date:
2
Question One
a. Fully amortized mortgage
It is a mortgage where the principle and interest are paid off for the loan's term through regularly
scheduled repayments. When the loan's interest rate is set at a certain percentage, the monthly
payment will be the same until the debt is paid off.
b. Partially amortized mortgage
In this type of mortgage, a portion of the monthly payment is made throughout the loan, with a
balloon payment or lump sum payment made at the end.
c. Interest-only amortized mortgage
Only the interest is paid each month, and the principal is paid off in a lump sum or installments
after a certain period. A borrower's debt will always be the same, regardless of how many
payments they have made.
d. Negatively amortized mortgage
Because of the lower interest rate, borrowers can pay off their loans in smaller payments. Since,
unlike other types of amortization, in which the principal lowers over time as payments are
made, this type of amortization causes the principal to become larger and larger as time passes.
Question Two
Mortgages with negative amortization have the most lender risk, followed by those with
interest-only payments as the next risky option. Lenders are no longer offering these types of
loans. People that have short-term cash flow concerns choose partially amortized loans. These
3
mortgages are less hazardous for lenders because they have a higher interest rate (Svensson,
2016). One of the most frequent and least risky types of mortgage is a fully amortized one, in
which a fixed monthly payment is made until the loan term expires.
Question Three
A freehold estate is a possessory interest in real estate that lasts indefinitely. A life estate
is a form of freehold estate that provides an individual with the right to freehold interests for
their or the property owner's lives.
Question Four
Mr. Smith constructed another building costing $20,000, providing him immediate
equity. He would have slightly more equity accessible at this stage, depending on his APR and
whether or not he pays any more on his mortgage payment. With this premise, I believe Duce
Bank would enable Mr. Smith to borrow against the structure, given that Mr. Smith has already
paid out 100% of the cost of construction and is proposin...
Review
Review
