Question

In: Finance

An investor has $60,000 to invest in a $280,000 property. He can obtain either a $220,000...

An investor has $60,000 to invest in a $280,000 property. He can obtain either a $220,000 loan at 9.5 percent for 20 years or a $180,000 loan at 9 percent for 20 years and a second mortgage for $40,000 at 13 percent for 20 years. All loans require monthly payments and are fully amortizing.

a. Which alternative should the borrower choose, assuming he will own the property for the full loan term?

b. Would your answer change if the borrower plans to own the property only five years?

c. Would your answers to (a) and (c) change if the second mortgage had a 10 year term?

Needs to be answered in Microsoft Excel with calculations

Solutions

Expert Solution

Ans a.
Finding the monthly installments for the two options
for 20 years loan Term Option 1 Option 2.
Installment calculation formula: 1st Mortgage 2nd Mortgage
A= [i*P*(1+i)^n]/[(1+i)^n-1]
A = periodical installment=??
P=Loan amount = $                                     220,000 $                           180,000 $                                                    40,000
i= interest rate per period 9.5% pa=0.7917% per month 9% pa=0.75% per month 13% pa=1.0833% per month
n=total no of payments 240 months=20yrs 240 months=20yrs 240 months=20yrs
Monthly Installments = [0.7917%*220000*1.007917^240]/(1.007917^240-1] [0.75%*180000*1.0075^240]/(1.0075^240-1] [1.0833%*40000*1.010833^240]/(1.010833^240-1)
Monthly Installments Amt = $                                    2,050.75 $                          1,619.51 $                                                    468.62
Monthly Installment Option 1 $                                    2,050.75
Total Monthly Installment in option 2 = $                                    2,088.13
So the borrower should choose $220,000@ 9.5% for 20 years.
Ans b.
When the loan period is made 5 years
5 years loan Option 1 Option 2.
Installment calculation formula: 1st Mortgage 2nd Mortgage
A= [i*P*(1+i)^n]/[(1+i)^n-1]
A = periodical installment=??
P=Loan amount = $                                     220,000 $                           180,000 $                                                    40,000
i= interest rate per period 9.5% pa=0.7917% per month 9% pa=0.75% per month 13% pa=1.0833% per month
n=total no of payments 60 months 60 months 60 months
Monthly Installments = [0.7917%*220000*1.007917^60]/(1.007917^60-1] [0.75%*180000*1.0075^60]/(1.0075^60-1] [1.0833%*40000*1.010833^60]/(1.010833^60-1)
Monthly Installments Amt = $                                    4,620.45 $                          3,736.50 $                                                    910.11
Monthly Installment Option 1 $                                    4,620.45
Total Monthly Installment in option 2 = $                                    4,646.62
So the borrower should choose $220,000@ 9.5% for 20 years.
Ans c.
Assume second mortgage in Second option is for 10 years Option 1 Option 2.
Installment calculation formula: 1st Mortgage 2nd Mortgage
A= [i*P*(1+i)^n]/[(1+i)^n-1]
A = periodical installment=??
P=Loan amount = $                                     220,000 $                           180,000 $                                                    40,000
i= interest rate per period 9.5% pa=0.7917% per month 9% pa=0.75% per month 13% pa=1.0833% per month
n=total no of payments 240 months=20yrs 240 months=20yrs 120 months =10 years
Monthly Installments = [0.7917%*220000*1.007917^240]/(1.007917^240-1] [0.75%*180000*1.0075^240]/(1.0075^240-1] [1.0833%*40000*1.010833^120]/(1.010833^120-1)
Monthly Installments Amt = $                                    2,050.75 $                          1,619.51 $                                                    597.23
Monthly Installment Option 1 $                                    2,050.75
Total Monthly Installment in option 2 = $                                    2,216.74
So the borrower should choose $220,000@ 9.5% for 20 years.
So there is no change in option in all the three scenario.

Related Solutions

1. An investor has $60,000 to invest in a $280,000 property. He can obtain either (option...
1. An investor has $60,000 to invest in a $280,000 property. He can obtain either (option A) a $220,000 loan at 9.5 percent for 20 years; or (option B) a $180,000 loan at 8.75 percent for 20 years and a second mortgage for $40,000 at 13 percent for 20 years. All loans require monthly payments and are fully amortizing. How much more would be the effective cost % if you went forward with option A instead of option B. I.e.,...
An investor has $60,000 to invest in a $280,000 property. He can obtain either a $220,000 loan at 9.5 percent for 20 years or a $180,000 loan at 9 percent for 20 years and a second mortgage for $40,000 at 13 percent for 20 years.
An investor has $60,000 to invest in a $280,000 property. He can obtain either a $220,000 loan at 9.5 percent for 20 years or a $180,000 loan at 9 percent for 20 years and a second mortgage for $40,000 at 13 percent for 20 years. All loans require monthly payments and are fully amortizinga. Which of alternative should the borrower choose, assuming he will own the property for the full loan term?b. Would your answer change if the borrower plans...
An investor has $70,000 to invest in a $290,000 property. He/she can obtain either a $230,000...
An investor has $70,000 to invest in a $290,000 property. He/she can obtain either a $230,000 loan at 8.5% for 20 years (option A) or a $180,000 loan at 9% for 20 years and a second mortgage for $40,000 at 11% for 15 years. Both loans require monthly payments and are fully amortizing Based on the analysis what option should the investor choose, assuming ownership for the full loan term? O option A O option B explore other options none...
An investor has $70,000 to invest in a $290,000 property. He/she can obtain either a $230,000...
An investor has $70,000 to invest in a $290,000 property. He/she can obtain either a $230,000 loan at 8.5% for 20 years (option A) or a $180,000 loan at 9% for 20 years and a second mortgage for $40,000 at 11% for 15 years. Both loans require monthly payments and are fully amortizing Based on the analysis what option should the investor choose, assuming ownership for the full loan term? O option A O option B explore other options none...
NEEDS TO BE DONE IN EXCEL WITH CALCULATIONS. An investor has $60,000 to invest in a...
NEEDS TO BE DONE IN EXCEL WITH CALCULATIONS. An investor has $60,000 to invest in a 280,000 property. He can obtain either a $220,000 loan at 9.5 percent for 20 years or a $180,000 loan at 9 percent for 20 years and second mortgage for $40,000 at 13 percent for 20 years. All loans require monthly payments and are fully amortizing a. Which alternative should the borrower choose, assuming he will own the property for the full loan term? b....
Q2: Suppose a US investor has $4000 to invest and can choose either a US investment...
Q2: Suppose a US investor has $4000 to invest and can choose either a US investment paying 2% or a foreign investment paying 4%, where e is currently 1.14 and the investor can lock in e in one year equal to 1.16. Q2a- How much will the US investment be worth after a year? q2b- How much foreign currency can investor get now? Q2c- How much foreign currency will investor get after a year? Q2d-How much (in dollars) will the...
Suppose a US investor has $11900 to invest and can choose either a US investment paying...
Suppose a US investor has $11900 to invest and can choose either a US investment paying 2.25% or a foreign investment paying 12%, where e is currently 32. What future e would leave the investor indifferent between investing at home or abroad?
An investor has a budget of $25 million. He can invest in the projects shown below....
An investor has a budget of $25 million. He can invest in the projects shown below. If the cost of capital is 10%, what investment or investments should he make? Initial Investment Cash Flows (starting at the end of year 1) Project A $17.5 million $10 million per year for 3 years Project B $12.5 million $5 million per year for 6 years Project C $15 million $7.5 million per year for 3 years Project D $10 million $3.75 million...
Marc wins the lottery and is given the following choice. He can either take $60,000 at...
Marc wins the lottery and is given the following choice. He can either take $60,000 at the end of each year for 25 years, or a lump sum of $700,000. Determine what interest rate he would have to beat for the lump sum to be the better choice.
Consider an investor with $10,000 available to invest. He has the following options regarding the allocation...
Consider an investor with $10,000 available to invest. He has the following options regarding the allocation of his available funds: (1) he can invest in a risk-free savings account with a guaranteed 3% annual rate of return; (2) he can invest in a fairly safe stock, where the possible annual rates of return are 6%, 8%, or 10%; or (3) he can invest in a more risky stock, where the possible annual rates of return are 1%, 9%, or 17%....
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT