Real Estate Final Study Guide
FIN 331 Final Exam Study Guide
10/15/13 6:34 PM
Intro to Real Estate & Time Value of Money
•
•
•
Mortgage – a loan you get to buy to piece of property where the property serves as collateral
Equity – the amount of your money in the property
Down payment – a one time name for your equity o House
$150,000
Mortgage - 120,000
Equity
30,000 à Down payment
30,000 ÷ 150.000 = 20% **What banks like to see
•
•
As you pay off your mortgage, your equity goes up
LTV (loan to value) – loan ÷ value of property o 120,000 ÷ 150,000 = 80% à you bought the property for
80% of its value or 80% of what it’s worth o LTV can be greater than 1 – contributed to housing market crash because they believed housing prices would never fall o What happens when an asset is worth less than the loan?
People start defaulting on their loan because you don’t want to pay for the loan
Under water / Upside down – occurs when housing prices fall and you owe more then it’s worth o House in 2000 à $150,000
House in 2008 à $100,000
Time Value of Money
• Why? So we can answer the question: “Do you want $100 now or
$200 in a year?” à What are you really getting?
•
•
Three Methods to find TVM:
1. Tables – can’t use anymore because a page is only so long and you can’t fit all the numbers on one page (had to assume)
2. Financial calculators (black box)
3. Formulas **Best Way**
Formulas
o FV of Lump Sum = (1 + i)^n o PV of Lump Sum =
1____
(1 + i)^n o FV of Annuity
= (1 + i)^n
1
o PV of Annuity
= 1 - ____1____
_______(1 + i)^n___
1
§
-
1
Common Errors Made ú i’s and n’s have to match! Make sure you have the correct i for the n (vice versa) ú if n is counting months à i ÷ 12 (i’s are always given annually)
o FV of Annuity Due = (1 + i)^n
1
o PV of Annuity Due = 1
___
-
-
1
× (1+i)
____1___
(1 + i)^n___
1
× (1+i)
o Be able to answer the following type of “jeopardy” questions:
10/15/13 6:34 PM
Intro to Real Estate & Time Value of Money
•
•
•
Mortgage – a loan you get to buy to piece of property where the property serves as collateral
Equity – the amount of your money in the property
Down payment – a one time name for your equity o House
$150,000
Mortgage - 120,000
Equity
30,000 à Down payment
30,000 ÷ 150.000 = 20% **What banks like to see
•
•
As you pay off your mortgage, your equity goes up
LTV (loan to value) – loan ÷ value of property o 120,000 ÷ 150,000 = 80% à you bought the property for
80% of its value or 80% of what it’s worth o LTV can be greater than 1 – contributed to housing market crash because they believed housing prices would never fall o What happens when an asset is worth less than the loan?
People start defaulting on their loan because you don’t want to pay for the loan
Under water / Upside down – occurs when housing prices fall and you owe more then it’s worth o House in 2000 à $150,000
House in 2008 à $100,000
Time Value of Money
• Why? So we can answer the question: “Do you want $100 now or
$200 in a year?” à What are you really getting?
•
•
Three Methods to find TVM:
1. Tables – can’t use anymore because a page is only so long and you can’t fit all the numbers on one page (had to assume)
2. Financial calculators (black box)
3. Formulas **Best Way**
Formulas
o FV of Lump Sum = (1 + i)^n o PV of Lump Sum =
1____
(1 + i)^n o FV of Annuity
= (1 + i)^n
1
o PV of Annuity
= 1 - ____1____
_______(1 + i)^n___
1
§
-
1
Common Errors Made ú i’s and n’s have to match! Make sure you have the correct i for the n (vice versa) ú if n is counting months à i ÷ 12 (i’s are always given annually)
o FV of Annuity Due = (1 + i)^n
1
o PV of Annuity Due = 1
___
-
-
1
× (1+i)
____1___
(1 + i)^n___
1
× (1+i)
o Be able to answer the following type of “jeopardy” questions: