Assessing a refinancing opportunity is a key component in determining the viability of a real estate investment. The purpose of this assignment is to demonstrate that the student understands the factors that should be taken into account in choosing a refinancing option, including financial calculations. An investor obtained a fully amortizing mortgage 4 years ago for $100,000 at 12 percent for 30 years. Mortgage rates have dropped, so that a fully amortizing 25-year loan can be obtained at 10 percent. There is no prepayment penalty on the mortgage balance of the original loan, but 3 points will be charged on the new loan and other closing costs will be $2000. All payments are monthly.

QUESTION

Assessing a refinancing opportunity is a key component in determining the viability of a real estate investment. The purpose of this assignment is to demonstrate that the student understands the factors that should be taken into account in choosing a refinancing option, including financial calculations.

An investor obtained a fully amortizing mortgage 4 years ago for $100,000 at 12 percent for 30 years. Mortgage rates have dropped, so that a fully amortizing 25-year loan can be obtained at 10 percent. There is no prepayment penalty on the mortgage balance of the original loan, but 3 points will be charged on the new loan and other closing costs will be $2000. All payments are monthly.

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Assessing a refinancing opportunity is a key component in determining the viability of a real estate investment. The purpose of this assignment is to demonstrate that the student understands the factors that should be taken into account in choosing a refinancing option, including financial calculations. An investor obtained a fully amortizing mortgage 4 years ago for $100,000 at 12 percent for 30 years. Mortgage rates have dropped, so that a fully amortizing 25-year loan can be obtained at 10 percent. There is no prepayment penalty on the mortgage balance of the original loan, but 3 points will be charged on the new loan and other closing costs will be $2000. All payments are monthly.
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Based on your calculations, respond to the following in a two- to three-page paper:

  • Explain whether or not it would be financially beneficial for the investor to refinance, if the plan is to own the property for the remaining loan term. Assume that the investor refinances an amount equal to the outstanding balance of the loan. Use your calculation(s) as evidence to support your conclusion, and explain how you arrived at the calculation(s) you include.
  • Explain whether or not it would be financially beneficial for the investor to refinance, if the investor planned to own the property for only five more years. Use your calculation(s) as evidence to support your conclusion, and explain how you arrived at the calculation(s) you include.

Your paper must be two to three double-spaced pages, (not including the title and reference pages) and must be formatted according to APA style as outlined in the Ashford Writing Center. Since this assignment is based on calculations, you are required to show all of your work in detail for both part (a) and part (b) by listing the components for each calculation and explaining the calculation taking place to reach the answer. This may be done in the paper, or on an attached Excel spreadsheet. Make sure that all calculation work is shown for full credit. Please use one scholarly source, in addition to the text for this assignment.

The Paper

  • Must be two to three double-spaced pages in length (not including title and references pages) and formatted according to APA style as outlined in the Ashford Writing Center (Links to an external site.).
  • Must include a separate title page with the following:
    • Title of paper
    • Student’s name
    • Course name and number
    • Instructor’s name
    • Date submitted
  • Must use at least one scholarly sources in addition to the course text.
    • The Scholarly, Peer Reviewed, and Other Credible Sources (Links to an external site.) table offers additional guidance on appropriate source types. If you have questions about whether a specific source is appropriate for this assignment, please contact your instructor. Your instructor has the final say about the appropriateness of a specific source for a particular assignment.
  • Must document all sources in APA style as outlined in the Ashford Writing Center.
  • Must include a separate references page that is formatted according to APA style as outlined in the Ashford Writing Center.

Example provided by instructor: https://youtu.be/jfP2qfjru0E

1. Excel Worksheet

Once again, the assignment questions are complex because they require several calculations to arrive at the final answer. Below, I will walk you through each step.

  1. Open an Excel worksheet.
  2. Type your name, course, and date at the top left.
  3. Write out the complete assignment prompts.
  4. Show all your work (the steps you took and the formulas you calculated). In Excel, simply highlight the answer fields and I can view the formula to ensure it is correct.
  5. Refer to my previous announcements on “Excel® Formulas” and “Video Examples”.

Part 1

“Explain whether or not it would be financially beneficial for the investor to refinance, if the plan is to own the property for the remaining loan term. Assume that the investor refinances an amount equal to the outstanding balance of the loan. Use your calculation(s) as evidence to support your conclusion, and explain how you arrived at the calculation(s) you include.”

Steps:

  1. Create a table in Microsoft® Excel®.
    • It needs the following columns: Loan program, annual interest rate, loan term (# of years), loan amount, and monthly payments.
    • In the first row, enter the current loan program information and calculate the monthly payments using the PMT function in Excel.
    • In the second row, enter the proposed loan program information and calculate the monthly payments using the PMT function in Excel.
  2. Compare the monthly payments.
    • Subtract the monthly payments to find the difference. Which monthly payment is lower, and by how much?
    • Question for discussion: why can’t the interest rates be compared directly to each other?
  3. Solve for the net proceeds:
    • Enter the amount of the proposed loan.
    • Subtract the cost of refinancing (hint: points and closing costs).
    • The answer equals the net proceeds from the proposed loan.
    • The question is… does the upfront cost of refinancing justify the lower interest rate on the new loan? For that answer, let’s keep going and compare the effective interest rate.
  4. Solve for the effective interest rate of the proposed loan.
    • Select a formula (Excel function). Hint: what are you solving for?
    • Input the variables. Hint: present value (PV) is the net proceeds you calculated in the previous step. Remember it’s a negative # in Excel.
    • Solve for the effective interest rate using the formula.
  5. Compare the interest rates.
    • Which interest rate is lower: the current loan’s rate, or the proposed loan’s effective rate?
    • Which loan program is more beneficial for the borrower, and why? Should the borrower refinance?
    • Which loan program is more beneficial for the lender, and why?

Part 2

“Explain whether or not it would be financially beneficial for the investor to refinance, if the investor planned to own the property for only five more years. Use your calculation(s) as evidence to support your conclusion, and explain how you arrived at the calculation(s) you include.”

Steps:

  1. Add to the table in Microsoft® Excel® that you created above.
    • Add the following column: Loan balance.
    • In the first row, calculate the current loan balance after 5 additional
    • In the second row, calculate the proposed loan balance after 5 years.
    • Subtract the monthly payments to find the difference. Which loan balance is lower?
  2. Solve for the effective interest rate of the proposed loan.
    • Select a formula (Excel function). Hint: what are you solving for?
    • Input the variables. Hint: present value (PV) is the same net proceeds you calculated in the Part 1. Remember it’s a negative # in Excel.
    • Another hint: future value (PV) will not be 0. It will be the loan balance you calculated for this loan. (Why?)
    • Solve for the effective interest rate using the formula.
  3. Compare the interest rates.
    • Which interest rate is lower after 5 more years: the current loan’s rate, or the proposed loan’s effective rate?
    • Which loan program is more beneficial for the borrower, and why? Should the borrower refinance?
    • Which loan program is more beneficial for the lender, and why?

2. APA Style Paper

Now that you’ve completed your calculations in Excel®, it’s time to write your paper with the results. Be sure to answer the questions posed in the Excel calculations above.

APA style formatting is required for this paper, including page headers.

Title Page as required with your name, date, and course.

Section headings as follows:

  • Introduction (overview and thesis statement)
  • Background (explain the textbook learning concepts)
  • Part 1 (explain your calculations & which loan you recommend)
  • Part 2 (explain your calculations & which loan you recommend)
  • Conclusion (summary and re-statement of thesis)

Citations: You must cite the textbook, including page number, at least twice. You must cit at least two other scholarly resources to earn full credit for resources.

References: All sources cited must be listed in the references section. All references must be cited in the paper.

2-3 pages minimum length (not including blank lines, title page, or reference page).

resources:

Brueggeman, W.B., & Fisher, J.D. (2011). Real estate finance and investments (14th ed.). McGraw-Hill Irwin. ISBN: 9780073377339

  • Chapter Six
  • Chapter Eight

ANSWER

Assessing the Financial Viability of Refinancing a Real Estate Investment

Introduction

Refinancing a real estate investment is a crucial decision that requires careful consideration of various factors. This paper aims to evaluate the financial benefits of refinancing for an investor who obtained a fully amortizing mortgage four years ago. We will assess two scenarios: (a) owning the property for the remaining loan term, and (b) owning the property for an additional five years. By performing detailed calculations and comparing the existing and proposed loan options, we can determine the most advantageous course of action for the investor.

Background

Real estate investments often involve mortgage financing. Refinancing allows investors to replace their existing mortgage with a new one that offers more favorable terms, such as a lower interest rate or reduced loan term. It is essential to consider factors such as monthly payments, interest rates, loan balances, and closing costs when evaluating refinancing opportunities (Brueggeman & Fisher, 2011).

Part 1: Refinancing for the Remaining Loan Term

To assess whether refinancing is financially beneficial for the investor who plans to own the property for the remaining loan term, we will compare the current loan program with the proposed loan program. Here are the steps and calculations involved:

Create a table in Excel with the following columns: Loan program, annual interest rate, loan term (years), loan amount, and monthly payments.

Calculate the monthly payments for the current loan program using the PMT function in Excel.

Calculate the monthly payments for the proposed loan program using the PMT function in Excel.

Compare the monthly payments and determine the difference. Note the loan program with the lower monthly payment.

Calculate the net proceeds by subtracting the cost of refinancing (points and closing costs) from the proposed loan amount.

Determine the effective interest rate of the proposed loan using the formula in Excel.

Compare the interest rates of the current loan and the proposed loan.

Analyze which loan program is more beneficial for the borrower and the lender.

Based on the calculations, if the proposed loan program offers a lower monthly payment and a lower effective interest rate compared to the current loan, it would be financially beneficial for the investor to refinance for the remaining loan term. The lower monthly payment reduces the investor’s monthly cash outflow, providing potential cost savings over the remaining loan term.

Part 2: Refinancing for a Five-Year Period

To assess whether refinancing is financially beneficial for the investor who plans to own the property for only five more years, we need to compare the loan balances of the current loan and the proposed loan after the additional five years (Segal, 2023). Here are the steps and calculations involved:

Add the “Loan balance” column to the existing Excel table.

Calculate the current loan balance after five additional years.

Calculate the proposed loan balance after five years.

Determine the difference in loan balances.

Solve for the effective interest rate of the proposed loan using the formula in Excel, considering the same net proceeds as calculated in Part 1.

Compare the interest rates of the current loan and the proposed loan after five years.

Analyze which loan program is more beneficial for the borrower and the lender.

Based on the calculations, if the proposed loan program results in a lower loan balance after the additional five years and a lower effective interest rate compared to the current loan, it would be financially beneficial for the investor to refinance for this shorter ownership period (J. Chen, 2022). The reduced loan balance and interest rate offer potential cost savings over the five-year timeframe.

Conclusion

In conclusion, assessing the financial viability of refinancing a real estate investment requires a detailed evaluation of various factors. By performing the calculations outlined in this paper, we can determine whether refinancing is beneficial for the investor in two different scenarios: owning the property for the remaining loan term or owning it for an additional five years. Based on the analysis of monthly payments, interest rates, and loan balances, the investor should refinance if the proposed loan program offers lower costs in terms of monthly payments and interest rates compared to the current loan. However, each investor’s situation may differ, and it is crucial to consider individual circumstances and consult with financial professionals before making a refinancing decision.

References

Brueggeman, W.B., & Fisher, J.D. (2011). Real estate finance and investments (14th ed.). McGraw-Hill Irwin. ISBN: 9780073377339

Chen, J. (2022). How Debt Financing Works, Examples, Costs, Pros & Cons. Investopedia. https://www.investopedia.com/terms/d/debtfinancing.asp 

Segal, T. (2023). 5 Cs of Credit: What They Are, How They’re Used, and Which Is Most Important. Investopedia. https://www.investopedia.com/terms/f/five-c-credit.asp 

 

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