1.A property can be purchased for $105,000 subject to an assumable loan at 9% (below market rates) with 15 years remaining, a balance of $70,000 and payments of 709.99. A comparable property without special financing costs $100,000 and a loan for $70,000 can be obtained at 11% for 15 years. What is the borrowers effective yield by paying the extra $5,000 for the assumable loan (annualize your answer, answer in percentage form without “%”; Ex: 9.2% would be 9.2)?
2.Assume a property can be purchased for $105,000. The existing mortgage has a balance of only $50,000, 15 years remaining and payments are $507.13. You want to assume the mortgage, but need to finance $70,000 total so you must take out a second mortgage for $20,000 for 15 years at 14%. Alternatively you could purchase an equivalent property for $100,000 by obtaining a loan for $70,000 for 15 years at the market rate of 11%.
a.What is the effective return of assuming the loan and taking out a 2nd mortgage? (answer in percentage form without “%”; Ex: 9.2% would be 9.2)?
3.Continuing from the above question, is it better to assume the loan and take out a second mortgage, or should you buy the alternative property and finance the purchase with a new loan at the market rate?