FIN 340: Chapter 6
CHAPTER SIX: RESIDENTIAL FINANCIAL ANALYSIS
Incremental Borrowing Cost (IBC)

Steps to find the IBC are:

Find out the MPVIFA for each loan amount

Divide loan amount with the MPVIFA
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You will get the MPs
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Find the difference between MPs

Find the interest rate that would be called as IBC ??????

172.47 (MPVIFA, ???, 25 years) = $10,000
Calculator Solution
 n= 25x12= 300
 PV= -10,000
 PMT= $172.47
 FV= 0
 i= 20.57%
 Incremental cost of borrowing weighted average= 12.95%
Early Repayment
Calculator Solution
 n= 5x12 = 60
 PV= -10,000
 PMT= $172.47
 FV= 10,117.32
 i= 1.7360% or 20.83 (annual)
Origination Fees
Calculator Solution
 n= 25x12= 300
 PV= -8900
 PMT= $172.47
 FV= 0
 i= 1.9316 or $23.18 (annual)
Loan Re-financing
Three important things are:

Terms of the existing loans
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Terms of the new loan being considered

Any charges with paying off the loans and getting the new loan.
FIN 340: Chapter 6
Loan Re-financing: Example:

A loan of $80,000 is made for 30 years @15%.

After 5 years interest rates fell and new loans are available @ 14%

Loan balance of existing loan is=$78976

A penalty of 2% must be paid on existing loan
If the new loan is made;

Origination Fee is there for $ 2500

Incidental closing costs are=$25
Should the borrower refinance?
Loan Refinancing and Early Payment
Loan Refinancing and Early Payment
Calculator Solution
 n= 25x12= 300
 PV= $ 4105
 PMT= 60.87
 FV= 0
 i= 17.57% is the projected return.
 It is attractive to borrow the new loan as return is higher than the cost of 14%.
Loan Refinancing and Early Payment; 10 years holding
Calculator Solution
 n= 10x12= 120
 PV= -$ 4105
 PMT= 60.87
 FV= 889
 i= 14.21
 It is not attractive to borrow the new loan as return is lower than the the one for
25 years option and is almost closer to the cost of 14% for the new loan.
Early Loan Repayment:
Lender Inducements
Calculator Solution
 n= 5x12 = 60
 PV= -33.348
 PMT= $ 716.74
 FV= 0
FIN 340: Chapter 6
 i= 10.50
 Is this attractive to the borrower?