Question

You have secured a loan from PNC Bank for two years to build a new business location. The terms of the loan are that you will borrow $150,000 now and an additional $50,000 in one year. Interest of 6 percent APR will be charged on the balance monthly. Since no payments will be made during the 2-year loan, the balance will grow at the 6 percent compounded rate. At the end of the two years, the balance will be converted to a traditional 30-year mortgage at a 4 percent interest rate. What will you be paying as monthly mortgage payments (principal and interest only)

You also secured a loan from Bank of America for two years to build. The terms of the loan are that you will borrow $125,000 now and an additional $25,000 in one year. Interest of 5 percent APR will be charged on the balance monthly. Since no payments will be made during the 2-year loan, the balance will grow. At the end of the two years, the balance will be converted to a traditional 15-year mortgage at a 3.75 percent interest rate. What will you pay as monthly mortgage payments (principal and interest only)?

1. Calculate the monthly payments on both loans
2. Create a spreadsheet with the amortization and payment schedule. Include, Beginning balance, monthly payment, monthly payment towards interest and amount towards principal, total interest paid, and ending balance for both loans.
3. What do you need to take into consideration when deciding which loan to pursue?

Answer 1

PNC Bank :

No Payment will be made during the 2-year loan the balance will grow at the 6 percent compounded rate.

Interest Rate = 6% =0.06

Year 0 = Loan Amount = 150,000

Total Term = 02 Years = 24 Months

Value at Year 02 =

= 169073.97

additional $50,000 Loan in one year.

Total Term = 01 Years = 12 Months

Value at Year 02 =

= 53083.89

Year = 0  Loan Amount = 150,000	Compounding Years =2	Value at Year 02 = 169073.97
Year = 1 Loan Amount = 50,000	Compounding Years =1	Value at Year 02 = 53083.89
Total Value at Year 02 = Sum of Both Amount	= 222,157.86

Now This $221,540.00 will be converted into 30 Years r mortgage at a 4 percent interest rate.

Monthly Payment for the Loan = PMT (Monthly Interest Rate, Tenure, Loan Amount) = PMT ( 4%/12, 30 Years*12,-221,540.00) = $1057.67

• Beginning balance = Ending Balance of Previous Month
• monthly payment = $1057.67
• Interest Payment = Beginning balance * ( Monthly Interest Rate) = Beginning balance * ( 4%/12)
• Principal Payment = monthly payment - Interest Payment
• Ending Balance = Beginning balance - Principal Payment

Now Total Interest Payment = Sum of Interest Payment = 159,219.70

Loan Amortization Schedule:

Due to Space constraints Only Start and end of the Part Uploaded of Loan Schedule.

Bank of America :

The terms of the loan are that you will borrow $125,000 now and an additional $25,000 in one year.

. Interest of 5 percent APR will be charged on the balance monthly.

Annual Interest Rate = 5% =0.05

Year 0 = Loan Amount = 125,000

Total Term = 02 Years = 24 Months

Value at Year 02 =

= 138,117.67

additional $50,000 Loan in one year.

Total Term = 01 Years = 12 Months

Value at Year 02 =

= 26,279.05

Year = 0  Loan Amount = 125,000	Compounding Years =2	Value at Year 02 = 138,117.67
Year = 1 Loan Amount = 25,000	Compounding Years =1	Value at Year 02 = 26,279.05
Total Value at Year 02 = Sum of Both Amount	= 164,396.71

Now This  $164,396.71 will be converted into 15 Years mortgage at a 3.75 percent interest rate.

Monthly Payment for the Loan  = PMT (Monthly Interest Rate, Tenure, Loan Amount)

= PMT ( 3.75%/12, 15Years*12,-221,540.00) = $1195.53

Loan Amortization Schedule

Final Decision : Since Total Interest Payment for Mortgauge Loan in PMC Bank is around 159,063 Vs Bank of America 50,789

Firm Should Choose Bank of America Loan.

But on the other hand Bank of America offering principal lesser as compared to PMC. So that will be a trade off.