A group of investors would like to purchase a property with $140 million. They a

Question

A group of investors would like to purchase a property with $140 million. They are considering two financing alternatives. the first is a 95%,30 year, fixed rate mortgage at 5.75%. With this mortgage the lender will require mortgage insurance which will cost $94000 per month.(this amount will be added to the monthly prepaid and interest payments). The mortgage insurance will be cancelled after 13 years so that it will not be required during years 14 to 30 of loan. The lender will charge 1 point in conjunction with this loan. The second option combines 80% 30 year , fixed fixed rate mortgage insurance loan amortised over 10 years with 7.25% interest rate. Total fees associated with this financing will be $2330000. The investors holding period is at least 30 years. Required: Which of the two alternatives would you recommend.

Explanation / Answer

Details First Option Property Price           140,000,000 Down payment @5%                7,000,000 Loan Amount             133,000,000 Additional charge @1%                1,330,000 Yearly Interest 5.75% Monthly Interest =5.75/12= 0.47920% Lease Amortization Formula for loan amortization = A= [i*P*(1+i)^n]/[(1+i)^n-1] Amt $ A = periodical installment ? P=Loan amount = 133,000,000 i= interest rate per period = 0.4792% n=total no of payments 360 A =[0.004792*133000000*1.004792^360]/(1.004792^360-1) A =776,185.70 So Monthly istallment =$776185.7 Total Payment in 30 Years: Total Monthly istallment paid in 30 years           279,426,852 Mortgage interest for 13 years@94000/month=              14,664,000 Down payment                7,000,000 Additional 1% fees                1,330,000 Total Payment in 30 Years: $   302,420,852.0 Second Option Property Price           140,000,000 Down payment @20%              28,000,000 Loan Amount             112,000,000 Additional fees                2,330,000 Yearly Interest 7.25% Monthly Interest =7.25/12 0.6042% Formula for loan amortization = A= [i*P*(1+i)^n]/[(1+i)^n-1] Amt $ A = periodical installment ? P=Loan amount = 112,000,000 i= interest rate per period = 0.6042% n=total no of payments 360 A=[0.006042*112000000*1.006042^360]/(1.006042^360-1) A= Monthly installment =$764,067.82 Total Installment paid in 30 years =           275,064,415 Down Payment              28,000,000 Fees                2,330,000 Total payment in 30 years           305,394,415 As the first option costs less, the first option is preferable.

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