An appraiser is looking for comparable sales and finds a property that recently sold for $200,000. She finds that the buyer was able to assume the seller's fully amortizing mortgage which had monthly payments based on a 7 percent interest rate. The balance of the loan at the time of sale was $140,000 with a remaining term of 15 years (monthly payments). The appraiser determines that if a $140,000 loan was obtained on the same property, monthly payments at the market rate for a 15-year fully amortizing loan would have been 8 percent with no points.
a. Assume that the buyer expected to benefit from the interest savings on the assumable loan for the entire loan term. What is the cash equivalent value of the property?
b. How would your answer to part (a) change if you assumed that the buyer only expected to benefit from interest savings for five years because he would probably sell or refinance after five years?