FIN 502 Chapter Notes - Chapter 13: Mortgage Insurance, Prime Rate, Direct Market

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greyporcupine303

29 Nov 2017

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Fin chapter 13 buying a home and mortgage financing. Mortgage financing is the traditional way of borrowing money to purchase a home home mortgage is a real estate loan with equal monthly payments. A mortgage is defined as the transfer of an interest in property to a creditor as security for payment of a debt with a right of redemption by the borrower upon repayment of the debt. This right to reclaim title from the lender is called the equity of redemption. The mortgager is the person who gives the security to obtain the loan - in other words, the mortgager is the homeowner. The mortgagee is the lender who receives the title to the property until the debt is fully repaid. The mortgage where the conveyance of title is involved is commonly called the first mortgage. the act of making a second mort- gage consists of using the equity of redemption as security or collateral for a loan.

Related Questions

---The purchase of a pool of mortgages is often financed through the sale of securities called mortgage-backed securities, or MBS. This is a key part of the securitization process. True or False.

---A bond selling at a discount will have a built-in capital gain if the bond is held to maturity. True or False

---Cumulative preferred stock:

a. has a right to vote cumulatively

b.has a higher required return than common stock

c.has a claim to dividends before bonds

d.requires dividends in arrears to be carried over into the next period

---Which of the following is NOT true regarding mortgaged-backed securities(MSB)?

a.The MSB process allows the mortgage bank or other financial institution that made the original mortgage loan to get its money back out of the loan and lend it to someone else.

b.Securitization provides liquidity to the mortgage market and makes it possible for banks to loan more money to home buyers.

c.MSB are sold to investors who can hold them as an investment or resell them to other investors.

d.all of the above are true

Please show work for both problems and I will give a thumbs up!

5. You are considering the purchase of a quadruplex apartment building. Effective gross income during the first year of operations is expected to be $33,600 ($700 per month per unit). First-year operating expenses are expected to be $13,440 (at 40 percent of EGI). Ignore capital expenditures. The purchase price of the quadruplex is $200,000. The acquisition will be financed with $60,000 in equity and a $140,000 standard fixed-rate mortgage. The interest rate on the debt financing is 8 percent and the loan term is 30 years. Assume, for simplicity, that payments will be made annually and that there are no up-front financing costs.

a. What is the overall capitalization rate?

b. What is the effective gross income multiplier?

c. What is the equity dividend rate (the before-tax return on equity)?

d. What is the debt coverage ratio?

e. Assume the lender requires a minimum debt coverage ratio of 1.2. What is the largest loan that you could obtain if you decide that you want to borrow more than $140,000?

12. An office building is purchased with the following projected cash flows:

â¢ NOI is expected to be $130,000 in year 1 with 5 percent annual increases.

â¢ The purchase price of the property is $720,000.

â¢ 100 percent equity financing is used to purchase the property.

â¢ The property is sold at the end of year 4 for $860,000 with selling costs of 4 percent.

â¢ The required unlevered rate of return is 14 percent.

a. Calculate the unlevered internal rate of return (IRR).

b. Calculate the unlevered net present value (NPV).

2. Health Care Event Protection. Christina Haley of San Marcos, Texas, age 57, recently suffered a stroke. She was in intensive care for 3 days and was hospitalized for 10 more days. Her total bill for this care was $125,500. After being discharged from the hospital, she spent 25 days in a nursing home at a cost of $170 per day. Christina, who earns $4,500 per month, missed two months of work. Christina had a health insurance plan through her employer. The policy had a $1000 deductible and an 80/20 coinsurance clause with a $2000 coinsurance cap. She had also accumulated 21 sick days (equivalent to one month) at work. Otherwise she had no long-term care or disability income insurance.

(a) How much of Christina's direct medical expenses was paid by her insurance policy?

(b) What did Christina have to pay for her nursing home care?

1. Calculating Life Insurance Need. Review the material in âHow Much Life Insurance Do You Need?â on pages 351â354. Then using dollar amounts that fit your personal situation, complete Worksheet 48: Determining My Life Insurance Needs from âMy Personal Financial Planner.â If you are currently single and childless, for the purposes of this activity, assume that you are 30 years old, have two children under age 5, are married, and earn $60,000 per year and redo the estimate of need. How would having a family change your need for life insurance?

Determining My Life Insurance Needs (page 353)

NOTE: Results here may differ slightly than when using Appendix A in text due to rounding.

Factors Affecting Need

Sample Only

Insert Your Own Figures

1. Income-replacement needs*

$823,219

2. Final-expense needs

$ 12,000

3. Readjustment-period needs

$ 19,000

4. Debt-repayment needs

$ 10,000

5. College-expense needs

$ 75,000

6. Other special needs

$ -

7. Subtotal (combined effects of items 1â6)

$ 939,219

8. Government benefits**

$390,370

9. Investment Assets Available

10. Current Life Insurance In Place

$ 98,000

11. Life insurance needed

$ 450,848

*Income Replacement Needs Calculator

Current Annual Income

$56,000

Percent of Annual Income To Be Replaced

75%

Annuity Amount (% desired of annual income)

$42,000

i (assumed interest rate

3.00%

n (number of annuity payments)

PV (present value) of Income Replacement Needs

$823,219

**Present Value of Social Security Benefits Calculator

Estimated Monthly Benefit (See Appendix B in Text)

$2,725.00

Estimated Annual Benefit

$32,700

i (assumed interest rate

3.00%

n (number of annuity payments)

PV (present value) of Government Benefits

$390,370

1. All the following statements concerning the use of an insured corporate cross-purchase buy-sell agreement are correct EXCEPT:

A. The value of any life insurance policies the deceased owned on the lives of the other stockholders will be included in his or her gross estate.

B. The buy-out will not involve dividend distributions to the deceasedâs estate or his or her family.

C. It is preferred over the redemption-type agreement when the stockholders are all in a higher tax bracket than the corporation.

D. The surviving stockholders get an increase in their basis for income tax purposes.

E. It produces greater equity of results than a redemption-type agreement when there is a significant difference in the ages of the stockholders and in their percentages of stock ownership.

2. All the following provisions are usually included in an insured stock cross-purchase buy-sell agreement EXCEPT:

A. A provision giving each surviving stockholder an option to buy a proportionate part of a deceasedâs stock.

B. A provision establishing the purchase price to be paid for the stock of a deceased stockholder.

C. A provision committing each stockholder to buy and maintain life insurance on the other stockholders.

D. A provision permitting each surviving stockholder to buy from the estate of a deceased stockholder the life insurance the deceasedâs estate owns on the life of each surviving stockholder.

3. All the following statements concerning the tax implications of a gift made to a person who dies within one year of receipt of the gift are correct EXCEPT:

A. If the property is willed back to the original donor, such property is denied the usual stepped-up basis for valuing property transferred to a designated heir.

B. The beneficiary of the deceasedâs will can be in receipt of capital gains, even if he or she sells the property on the date of the testatorâs death.

C. If the decedent wills the property to someone other than the original owner or his or her spouse, the transferee can have the benefit of the stepped-up basis.

D. If the original donor is the spouse of the decedent-donee, a testamentary disposition to the decedentâs children will prevent realization of the benefits of the stepped-up basis.

4. D and E, a married couple, make a gift of their vacation home to their children but reserve the right to use the property during their lifetimes. Under these circumstances, which of the following statements are correct?

I. The property will be included in the donorâs gross estate at their deaths.

II. The gift tax annual exclusion is not available to D and E.

III. The unified tax credit is available to D and E.

A. I and II only

B. I and III only

C. II and III only

D. I, II and III

5. Which of the following statements most accurately describes the rights conveyed to a minor under the terms of a trust that give the minor a so-called âCrummyâ power?

A. The right to withdraw the corpus at any time during minority.

B. The right to accumulate trust income to age 21 and the right to receive these funds as a distribution of corpus.

C. The right to withdraw limited amounts of the trust corpus for a limited time after a contribution is made to the trust.

D. The right to withdraw the trustâs income for the calendar year without a guardianâs approval.

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FIN 502 Chapter Notes - Chapter 13: Mortgage Insurance, Prime Rate, Direct Market

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