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Real Estate Finance

MBA Program
Solve Q-01

Constant Amortization Mortgage (CAM):

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.
Constant Payment Mortgage (CPM):
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.
Graduated Payment Mortgage (GPM):
The objective is to provide for a series of mortgage payment that are lower in the initial
years of the loan than they would be with a standard mortgage loan. GPM payment then
gradually increases at predetermined rate as borrower income expected to rise over time.

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.

GPM- The payment pattern offsets the tilt effect to some extent, hence reducing the
burden faced by households when meeting mortgage payments from current income in an
inflationary environment.

When all 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.
Solve Q.02

Amortization is the gradual repayment of a debt over a period of time, such as monthly
payments on a mortgage loan or credit card balance.
To amortize a loan, your payments must be large enough to pay not only the interest that
has accrued but also to reduce the principal you owe. The word amortize itself tells the
story, since it means "to bring to death."

Amortization –
1. The provision to pay a debt over a period of time.
2. The gradual repayment of borrowings in a series of installments.
3. A transaction or security where the principal reduces over the life of the agreement.
4. The writing off or reduction in value of an intangible asset over time
5. Allocation of the cost of an asset over its estimated useful life
Real interest rate
The rate of interest excluding the effect of expected inflation; that is, the rate that is
earned in terms of constant-purchasing-power dollars. Interest rate expressed in terms of
real goods, i.e. nominal interest rate adjusted for expected inflation.

The nominal current interest rate minus the rate of inflation, For example, an investor
holding a 10% certificate of deposit during a period of 6% annual inflation would be
earning a real interest rate of 4%. The real interest rate is a more valid measure of the
desirability of an investment than the nominal rate is. Real interest rate is the interest rate
you earn on an investment minus the rate of inflation. For example, if you're earning
6.25% on a bond, and the inflation rate is 2%, your real rate is 4.25%. That's enough
higher than inflation to maintain your buying power and have some in reserve, which you
could use to build your investment base. But if the inflation rate were 5%, your real rate
would be only 1.25%.
Q.3: What are loan closing costs? How can they be


Loan closing cost:

Loan closing costs are incurred in many types of real estate financing, including
residential property, income property, construction, and land development loans. There
are three category of loan closing cost. Such as
• Statutory costs
• Third-party charges
• Additional finance charges

Statutory costs:
Statutory costs are usually collected at the title closing, which may occur at the same time
as the loan closing. At the same time a mortgage loan is closed between borrower and
lender. Statutory charges are made for services performed by governmental agencies for
the borrower; they do not provide income to the lender. Statutory costs should not be
included as additional finance charges because they do not affect the cost of borrowing.
Third-party charges:
Third-party charges are charges for services such as legal fees, appraisals, surveys, past
inspection, and title insurance. Like statutory charges, these charges may occur if the
buyer paid cash to buy a property. If a loan is made, charges for these services are
collected by the lender. But they are in turn paid out to third party. They do not constitute
additional income to the lender.
Additional finance charges:
Additional charges as loan fees. Loan fees are intend to cover expenses for processing
loan applications, preparation of loan documentation and amortization schedules,
obtaining credit reports, and other expenses. Closing cost do not affect the cost of
borrowing are additional finance charges levied by the lender. These charges constitute
additional income.
The most important aspects of the Act concern the pieces of information that must be
disclosed to a borrower prior to extending credit: annual percentage rate (APR), term of
the loan and total costs to the borrower. This information must be conspicuous on
documents presented to the consumer before signing, and also possibly on periodic
billing statements.

Cost of credit that consumers pay, expressed as a simple annual percentage. According to
the federal Truth in Lending Act, every consumer loan agreement must disclose the APR
in large bold type. The APR is the annual effective interest rate.