Home Equity Conversion Mortgage (HECM) REVISED EXAM 3 Questions and Answers Latest (Verified Answers)
0 view 0 purchase
Course
HECM
Institution
HECM
Home Equity Conversion Mortgage (HECM) REVISED EXAM 3 Questions and Answers Latest (Verified Answers)
Value of any asset is the expected future cash flow discounted back to the present to account
for the time value of money & risk
- Appraisal method to determine the present value is to project ...
Home Equity Conversion Mortgage
(HECM) REVISED EXAM 3 Questions and
Answers Latest 2024 - 2025 (Verified
Answers)
Value of any asset is the expected future cash flow discounted back to the present to account
for the time value of money & risk
- Appraisal method to determine the present value is to project out the future cash flows & then
discount them back to today
- This method has advantages & disadvantages compared to direct capitalization: *Direct
capitalization relies heavily on data from comparable sales to determine the cap rate, thus its
use requires a high degree of comparability between properties; Heterogeneous properties may
this challenging; Further, long-term leases from many different tenants can vary significantly*
- *The main disadvantage is that a detail analysis must account for all aspects over the
foreseeable future; Many social, economic, & governmental factors impact the price of a
property; It's a major challenge to be able to project the net numbers after considering all the
aspects; It comes w/ experien - ✔✔Discounted Cash Flow
- Rent
- Growth in the price of the property
--> An appraisal method to determine the present value is to project out the future cash flows
and then discount them back to today - ✔✔Real estate cash flows include:
- Assume that vacancy & collections will be 10% of PGI
- Operating expenses have been broken down into real estate taxes, insurance, utilities,
management, etc. The amount is assumed to equal 40% of EGI
- Capital expenditures will be taken for a new roof & future tenant improvements; The amount
assumed is 5% of EGI - ✔✔Centre Point
- When the property is sold, the equity reverts back to the owner; Thus, we term the proceeds
from the sale as the Reversion
- Since we're holding the property for 5 years, we need the year 6 NOI
> We'll convert this into a Terminal Value using a Going-out Cap Rate or a Terminal Cap Rate
- The Net Sales Proceeds (NSP) are the final amount received by the owner
- We must subtract costs to make the sale; Transaction costs
- These include: Brokerage fees, Attorney fees, Recording of the deed, Transfer tax, & more -
✔✔Future Sales Proceeds
*- More households can own their home*
,*- Businesses can use their cash for core activities*
*- Investors can leverage & diversify investments*
*- Homeowners can obtain credit on better terms than consumer debt (home equity credit lines)*
~ Tax favored
~ Longer term
~ Lower interest rate - ✔✔Some Effects of Mortgage Debt
What we term a mortgage is actually a loan that consists of 2 contracts:
1) Note - provides evidence of the loan
2) Mortgage (deed of trust) - secures the loan - ✔✔Mortgage Loan
- Loan amount
- Interest rate
- Term to maturity
- Payment - ✔✔The Note includes the loan terms...:
*This determines when the entire remaining balance on the loan must be paid in full*
- Fully amortizing is a loan that's paid off fully at the end of the term
- Thus, the payment includes interest plus the principal
- The interest rate & payment are fixed or the same amount throughout the term - ✔✔Term to
Maturity
Repayment of a loan thru a fixed number of fixed-amount monthly installments; Requires the
same $ payment each month or payment period, however, it's apportioned unequally between
interest & principal payments
- Level payment mortgages allow borrowers to know exactly how much they'll have to pay on
their mortgages each pay period; this stability makes it easier for them to create budgets & stick
to them
- In early years, major proportion of installment amt. goes towards payments of the interest; it's
only in later years, when most of the interest has been paid off, that the principal balance begins
to reduce significantly (straight line amortization)
- Can be either fixed or variable-rate loans; Can sometimes result in negative amortization,
which inflates the balance of the loan; Not appropriate for all types of homeowners & can result
in financial entrapment - ✔✔Interest & Principal Payments on a Level Payment Loan
1) *Fixed rate*
- 365-day interest, but commercial mortgage loans are 360-day interest; Monthly charge is 1/12
of stated annual rate
2) *Adjustable rate*
- Index rate (market-determined rate beyond control of either borrow or lender); US Treasury
Constant Maturity Rate; London Interbank Offer Rate (LIBOR); Margin (Lender's markup);
Average is stable at 277-278 basis points (2.77-2.78%); Change date (Date that interest rate
changes each time period); New index rate commonly is the last published rate 45 days, for
, example, before the change date; Interest rate caps (Limit on changes in interest rate charged);
Periodic; Lifetime - ✔✔The Note - Interest Rates
One-Year CTM - ✔✔The Most Common ARM Index Rate
*Always in arrears (end of month)*
*Virtually always monthly*
*Various arrangements for fixed-rate loan*:
- Level payment
- Partially amortized
- Term for amortization
- Term to maturity & a balloon payment
- Interest only is non-amortizing (sometimes called a "bullet" loan)
- Negative amortization - ✔✔Payments
*Traditional common law: No right of prepayment unless explicitly provided*
*Modern statutory case: Right of prepayment unless explicitly prohibited*
*Loans w/ right of prepayment:*
- All "conforming" & FHA/VA loans
- Home equity credit lines
*Loans with restricted right of prepayment:*
- Subprime home loans
- "Jumbo" home loans
- Most income property mortgage loans
*Prepayment Penalties*
- Percentage of outstanding balance
- Yield maintenance
- Defeasance - ✔✔The Note: Right of Prepayment
*Nonrecourse loan: No personal liability*
- Exculpatory clause (relieves one party of liability by other party's wrongdoing; or one party is
freed of all liability arising out of performance of that contract)
- Single-purpose, single asset, bankruptcy remote entity for borrower
*Inclusion of mortgage clauses by reference* - ✔✔The Note: Other Terms
*Mortgage involves 2 parties:*
1) The borrower (the mortgagor) and
2) The lender (the mortgagee)
*A trust deed involves 3 parties:*
1) Borrower (the trustor)
2) The lender (the beneficiary)
3) The title company, escrow company, or bank (the trustee) that holds title to the lien for the
benefit of the lender & whose sole function is to initiate and complete the foreclosure process at
the request of the lender
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller AnswersCOM. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $7.99. You're not tied to anything after your purchase.
