After viewing the below problem, what is/how do you calculate the Unexpended Poi
ID: 2807843 • Letter: A
Question
After viewing the below problem, what is/how do you calculate the Unexpended Points?
You are considering purchasing an apartment for $1,600,000 which contains 30 one bedroom apartments and 10 two bedroom apartments. Land is estimated to be 15% of the purchase price. The one bedroom apartments are expected to rent for $545 per month and the two bedroom apartments are expected to rent for $675 per month. You expect rents to increase by 6% per year. You project that your vacancy and collection losses will be about 4%. You expect that operating expenses will be 35% of the adjusted gross income. The Friendly Federal Savings Bank has agreed to lend to you at a 8.25% annual interest rate with an amortization period of 30 years paid monthly The loan will have only a term of 10 years. The amount of the loan is going to be based upon a 1.4 Debt Service Coverage Ratio for the first year's NOI. The bank is going to charge four points. You expect to sell the property at the end of the fifth year. The sales price is expected to be based upon a 10.5% capitalization rate of the year six NOI. Sales expenses are projected at 8%. Your cost of equity capital is 11% Your accountant advises you that you should use a 28% marginal tax rate for the analysis. Loan closing is expected to be May 11 of this yearExplanation / Answer
It denotes Mortgage points. Mortgage points are when the Bank charges you x% as Mortgage points to cover lending related costs, such as processing fees, origination fees, underwriting costs etc. Similarly, they may be recovered as a consideration for keeping the interest rate low.
It seems here that the points are being paid at the repayment of loan. It makes sense that they may be in the form of Interest buy down payment.
They are given in the problem to be 4%. They will be calculated simply as 4% of the loan amount.
Since you've calculated the Mortgage payoff to be $1,305,853 (assuming this is without interest cost), the points payout will be 4% of this amount or $(1,305,853)*4%=$52,234.12.
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