The information presented here applies to questions 1 -- 5] You are considering
ID: 2784751 • Letter: T
Question
The information presented here applies to questions 1 -- 5] You are considering an investment in a small medical office building in Hackensack, NJ. The asking price for the building is $3.5M and a local commercial bank has offered to provide financing in the form of a 5-year mortgage with a 25-year amortization period. The interest rate on the mortgage is 6% and payments are made on an annual basis. If the maximum loan-to-value (LTV) ratio for the loan is 60%, 1 points
QUESTION 2
What is your annual mortgage payment assuming that the lender will provide financing at a 60% LTV?
Explanation / Answer
We have here that the Loan to Value Ratio is 60%, or in other words, only 60% of the value of the building will be financed by the Bank, and the investor will have to infuse his own money for the remaining 40%.
Thus, we have the total financing amount to equal:
= $3.5 million*60%
= $2.1 million.
Question 2 Now we are required to calculate the annual mortgage payments with a repayment period of 5 years, and an interest rate of 6%.
The Repayment amount for an equated annual installment is given by the following expression:
=Loan Amount/Present Value of an Annuity @ interest rate of i%
= $2.1 million/4.212364
= $593,491.00
(The Discounting factor has been derived from the discounting tables for an annuity payment for 5 years at the rate of 6%)
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