PLEASE ENTER ANSWERS IN BLUE BOLD INK!
Ann wants a mortgage to buy a house. Ann gives the following information to the bank:
Income: $240k/year or 20k/month
Average monthly debt: $2k
Estimated monthly Taxes + Insurance: $700
Down-payment: $50k saved
-Ann’s down-payment will be $50k, she will take out a mortgage for the remainder
Ann qualifies for a 30 year FA-CPM-FRM (monthly payments & monthly compounding) with:
Annual interest rate: 4%
Income test: (28%/36%)
Collateral test: LTV ≤ 95 % → B 0 ≤ 19∗D P0
Closing costs + buy-down points: $5,000 + 1.75% of the balance at origination.
-Example: if Ann gets a $100k mortgage, she will pay $5k + $1.75k=$6.75k at origination.
1 Underwriting
1.1: Fill in the spreadsheet (sheet “Underwriting”) for Ann.
1.2: based on the FE DTI what is the biggest payment Ann can make?
1.3: based on the BE DTI what is the biggest payment Ann can make?
1.4: based on both the FE & BE DTI what is the biggest payment Ann can make?
1.5: based on both the FE & BE DTI what is the biggest loan Ann can get?
1.6: based the LTV test and Ann’s $50k down-payment, what is the biggest loan Ann can get?
1.7: based on the income & collateral tests, what is the biggest loan Ann can get?
1.8: based on the income & collateral tests, what is the biggest payment Ann can make?
1.9: if Ann makes a 50k down-payment, how much house can Ann afford?
1.10: how much are Ann’s total mortgage closing costs?
Use the following information for the remaining questions.
Ann would like to buy a house.
It costs $2,500,000.
Her down payment will be $50,000.
She will take out a mortgage for the remainder.
It will be a 30 year, fully amortizing, FRM, with constant monthly payments and monthly compounding.
The annual interest rate is 4.00%.
She will pay $5,000 in closing costs at origination.
She will also pay 1.75% of the balance in buy-down points at origination.
Note: the home is bought and the loan is taken in month 0, the first payment is due in month 1.
In the spreadsheet where it says “cash inflow”, “outflow” and “net cash flow” you should only take into account cash
flow related to the mortgage.
2. Fill in the spreadsheet (sheet “FA AMORTIZATION SCHEDULE”) for Ann.
(It is called an amortization schedule or amortization calendar.)
3. Compute Ann’s annualized IRR for the mortgage in the spreadsheet. (Use the net cash flow.)
(3.a) What is the annualized IRR for the mortgage?
(3.b) Is it higher or lower than the mortgage contract rate?
(3.c) Why?
4. Plot Ann’s mortgage balance in one graph. Place the graph here.
5. Plot Ann’s monthly mortgage payment, interest payment and principal payment in one graph. Place the graph here.
She forecasts four possible scenarios for house price appreciation (HPA).
Optimistic Case: 4.5% annual HPA, hence 4.5/12% monthly HPA
Base Case: 2.5% annual HPA, hence 2.5/12% monthly HPA
Pessimistic Case: 0% annual HPA, hence 0/12% monthly HPA
Very Bad Case: -6% annual HPA, hence -6/12% monthly HPA
6. Plot Ann’s home equity every month under each of the four HPA scenarios in one graph. Place the graph here.
7. Assume Ann will make the required monthly payment every month for 30 years.
(7.a) How much home equity will Ann have after 10 years (120 months) of payments under each of the four scenarios?
(7.b) After 30 years?
Home Home
Equity in Equity in 30
Scenario : HPA 10 years years
Optimistic 4.50%
Base 2.50%
Pessimistic 0.00%
Very Bad -6.00%
NOTE: THE FOLLOWING PART OF THE ASSIGNMENT IS OPTIONAL (BUT FUN) AND WILL NOT BE GRADED!!!
Partially Amortizing (PA) Amortization Schedule
In the sheet titled “PA AMORTIZATION SCHEDULE” assume all is the same as before EXCEPT there is a $500,000 balloon
due in 30 years.
8. Fill in the spreadsheet for Ann. (It is called an amortization schedule or amortization calendar.)
9. Compute Ann’s annualized IRR for the mortgage in the spreadsheet. (Use the net cash flow.)
(9.a) What is the annualized IRR for the mortgage?
(9.b) Is it higher or lower than the mortgage contract rate?
(9.c) Why?
10. Plot Ann’s mortgage balance in one graph. Place the graph here.
11. Plot Ann’s monthly mortgage payment, interest payment and principal payment in one graph. Place the graph here.
(note: don’t include the final balloon payment in Ann’s monthly mortgage payment)
She forecasts four possible scenarios for house price appreciation (HPA).
Optimistic Case: 4.5% annual HPA, hence 4.5/12% monthly HPA
Base Case: 2.5% annual HPA, hence 2.5/12% monthly HPA
Pessimistic Case: 0% annual HPA, hence 0/12% monthly HPA
Very Bad Case: -6% annual HPA, hence -6/12% monthly HPA
12. Plot Ann’s home equity every month under each of the four HPA scenarios in one graph. Place the graph here.
13. Assume Ann will make the required monthly payment every month for 30 years.
(13.a) How much home equity will Ann have after 10 years (120 months) of payments under each of the four scenarios?
(13.b) After 30 years?
Home Equity in 10 Home Equity in 30
Scenario : HPA years years
Optimistic 4.50%
Base 2.50%
Pessimistic 0.00%
Very Bad -6.00%