Question

You are considering a creative financing arrangement for the purchase of a small apartment complex. The property is selling for $2,600,000. Both lenders have agreed to allow the arrangement to proceed, if you decide to pursue it. The first mortgage will be for 65% LTV over 25 years with monthly payments at 9%. The first mortgage charges a 0.5% origination fee and no points. The second mortgage will be for 20% LTV over 10 years with monthly payments at 15%. The second mortgage charges a 1% origination fee and 3 points. Neither loan has a prepayment penalty. Assuming you intend to pay both loans off after ten years (when you sell the property), what would be the actual interest rate paid on this combined loan?

Answer 1

Firstly you need to know the basic concepts, loan to value ratio refers to the amount that will be available to the investor by the bank. Banks in most of the case will not provide the full amount as it would be riskier for them in that case, and the remaining amount the person needs to borrow out of his own borrowed funds. Thus if LTV is .65, than it means that 65% will be provided by the bank and the rest amount we have to bring from our own personal sources.

Loan 1=$2600000

Loan by bank=$2600000*.65=1690000

Repayment by bank in 25*12i.e. 300 instalments

Principal repayment=1690000/300=$5633.33 in every month.

Total interest=1690000*9%*5=

Origination fees paid=1690000*.5%=$8450

Loan 2

LTV=20% of 2600000=520000

Origination fee=$520000*1%=$5200

Points paid=$520000*3%=$15600

Now looking at images you will find that

Interest on loan1=1918800

And interest on loan2=394440

Total interest=2313240

Thus total amount paid as interest considering all the costs i.e. interest, points, origination fees

2313240+8450+5200+15600=$2342490