Financial Planning W9- Special Mortgages, Indebtedness, and Debt Management

Financial Ratios: Net Worth formula?

Net Worth = Assets − Liabilities

Financial Ratios: Cash Flow formula?

Cash Flow = Net Income − Expenses

Emergency Fund formula?

Emergency Fund = Monthly Expenses × Months

Financial Ratios: TDSR formula?

TDSR = (PITH + Other Debt Payments) ÷ Gross Income

Calculate LTVR if Property Value = $500,000 and Mortgage = $400,000

LTVR = Mortgage ÷ Property Value; LTVR = 400,000 ÷ 500,000 = 0.80 = 80%

Calculate monthly bridge loan interest if Loan = $70,000, Interest Rate = 6.5%, Days = 30

Daily Rate = 0.065 ÷ 365 = 0.000178082; Monthly Interest = 70,000 × 30 × 0.000178082 = $373.97

Daily interest rate formula

Daily Rate = Interest Rate ÷ 365

• convert interest rate into a decimal

Maximum LTVR before mortgage insurance is required

80%

Typical length of a bridge loan

4–6 months

Typical bridge loan interest rate

Prime + 2–4%

What is the 80% rule in mortgage lending?

Lenders usually will not lend more than 80% of a property's value without mortgage insurance.

If a property value is $500,000, what is the maximum mortgage without insurance using the 80% rule?

Max Mortgage = 0.80 × 500,000 = $400,000

Why do lenders require inspections for process draw mortgages?

To confirm each construction stage is completed before releasing funds and to reduce lender risk.

What are advantages of a variable rate mortgage?

• Potentially lower starting rates

• ability to benefit if prime rates drop

• often allows lump-sum or prepayments

What is the main risk of a variable rate mortgage?

Payments can increase if interest rates rise.

How are funds released in a Process Draw Mortgage?

Funds are released at construction milestones: Stage 1 = 35%, Stage 2 = 65%, Stage 3 = 100%.

Why are inspections required for Process Draw Mortgages?

Professional inspections confirm each construction stage is complete before releasing funds, reducing lender risk.

How is LTV calculated for bridge loans?

• Sometimes based on the equity of the current home

• not just the new purchase

How do you calculate total interest on a bridge loan?

Total Interest = Monthly Interest × Number of Months

What is a common temporary payment scenario for bridge loans?

Borrowers may pay two mortgages simultaneously while the bridge loan is active.

What are key risks of a bridge loan?

• Higher interest

• temporary double payments

• secured by existing home equity

How can adjusting amortization help in debt consolidation?

• Extending amortization reduces monthly payments

• improves cash flow

• total interest may increase

What is the formula for Emergency Fund Ratio (EFR)?

EFR = Liquid Assets ÷ Monthly Expenses → shows months of coverage

Variable mortgage rate formula?

Interest Rate = Prime ± margin

How to calculate new payment when interest rises?

• Keep PV, n, P/Y, C/Y the same.

• Enter the new I/Y (interest rate) on a financial calculator.

• Compute PMT → this is the new monthly payment.

How is the premium calculated and when is it required?

• Premium = Mortgage × Insurance Rate

• required when LTV > 80%

What is a construction mortgage?

Loan used to finance building a new home; secured by a line on the property.

Completion Mortgage

• funds released after construction is finished

• requires final inspection

• smaller down payment

• lower risk

Why do lenders require inspections for process draw mortgages?

To confirm construction stages are completed before releasing funds and to reduce lender risk.

What is a bridge loan?

Short-term loan used to buy a new home before selling the existing one; secured by equity in the current home.

Typical characteristics of a bridge loan

• Short term (4–6 months)

• interest rate usually Prime + 2–4%

• often ≤ $200,000

• may include administrative or legal fees

What security is typically used for bridge loans?

• Equity in existing home

• purchase and sale agreements

• possible registered charge on property

• security interest in investments

What is debt consolidation?

• Combining multiple debts into one loan

• usually at a lower interest rate

• to reduce monthly payments

• improve cash flow

Why does debt consolidation improve cash flow?

High-interest debts are replaced with a lower-interest loan, reducing total monthly payments.

How can extending amortization help in debt consolidation?

Extending amortization lowers monthly payments and improves cash flow but increases total interest paid.

Fixed vs Variable Rate Mortgages

• Fixed: interest rate stays constant, payments predictable.

• Variable: interest rate changes with prime, payments may change.

Savings Ratio formula and negative ratio meaning?

• Savings Ratio = Savings ÷ Net Income

• Negative savings ratio → overspending

Total Debt Service Ratio (TDSR) formula

TDSR = (Housing Costs + Other Debt Payments) ÷ Gross Income; High TDSR → borrower may be over-leveraged

Loan-to-Value Ratio (LTVR) formula

LTVR = Mortgage Amount ÷ Property Value

Bridge loan monthly interest formula

Monthly Interest = Loan Amount × Days × (Interest Rate ÷ 365)

Calculate Emergency Fund Ratio given Liquid Assets = $16,200, Monthly Expenses = $4,400?

EFR = 16,200 ÷ 4,400 ≈ 3.7 months

What must you include in the PV (mortgage amount) when computing mortgage payments, N, etc?

Line of Credit