Question

Can someone please explain what this actually means:

Assume that Harrick Co. borrows $1,000,000, signing a 20-year mortgage note with a stated interest rate of 10.75 percent as part of the financing for a new plant. If Associated Savings demands 4 points to close the financing, Harrick will receive 4 percent less than $1,000,000—or $960,000—but it will be obligated to repay the entire $1,000,000 at the rate of $10,150 per month. Because Harrick received only $960,000 and must repay $1,000,000, its effective-interest rate is increased to approximately 11.4 percent on the money actually borrowed. Why is 11.4%? Why are the monthly installments $10,150?

Answer 1

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Explanation:

On the statement of financial position, Harrick should report the mortgage note payable as a liability using a title such as “Mortgage Notes Payable” or “Notes Payable—Secured,” with a brief disclosure of the property pledged in notes to the financial statements.

Mortgages may be payable in full at maturity or in installments over the life of the loan. If payable at maturity, Harrick classifies its mortgage payable as a non-current liability on the statement of financial position until such time as the approaching maturity date warrants showing it as a current liability. If it is payable in installments, Harrick shows the current installments due as current liabilities, with the remainder as a non-current liability.

Lenders have partially replaced the traditional fixed-rate mortgage with alternative mortgage arrangements. Most lenders offer variable-rate mortgages (also called floating-rate or adjustable-rate mortgages) featuring interest rates tied to changes in the fluctuating market rate. Generally, the variable-rate lenders adjust the interest rate at either one- or three-year intervals, pegging the adjustments to changes in the prime rate or the London Interbank Offering (LIBOR) .