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Homework answers / question archive / Cindy is purchasing a $360,000 home with a $288,000 SAM at 6% interest, amortized over 25 years, with one discount point
Cindy is purchasing a $360,000 home with a $288,000 SAM at 6% interest, amortized over 25 years, with one discount point. The lender’s share of the price appreciation is 30% as set forth in the mortgage agreement. Cindy assumes the appreciation rate of the property will be 3.5% per year and the holding period of 5 years.
1. What is the appreciation of the property during the holding period?
a. $53,108
b. $63,000
c. $67,567
d. $73,657
e. None of the above
2. What is the effective borrowing cost?
a. 7.47%
b. 7.39%
c. 6.24%
d. 6.04%
e. None of the above
Part (1):
Amount of appreciation= C(1+r)^n-1
Where C= Cost of house, r= rate of appreciation per year and n= holding period in number of years.
Given,
Cost of house= $360,000 and expected appreciation= 3.5%
Holding period= 5 years
Plugging the inputs, amount of appreciation= 360000*((1+3.5%)^5-1)
=360000*0.187686306= $67,567.07
Answer is choice (c)
Part (2):
Being a shared appreciation mortgage (SAM), predetermined share of appreciation should be paid to the lender at the end of the term. With appreciation at 3.5% per year, and the agreed share of 30%, amount of appreciation to be shared is 67567.07*30%= $20,270.12.
After paying 1 point, net loan received is $285,120.
Amount to pay off the loan is the balance outstanding calculated as the present value of remaining monthly payments ascertained at $259,004.41 using PV function of Excel plus the share of appreciation.
Effective borrowing cost = 7.47% ascertained using RATE function of Excel.
Answer is choice (a)
Details of calculation as below:
please see the attached file for the complete solution.
