Question

An institutional lender is willing to make a 10-year constant payment mortgage of $5 million for a retail building you plan on purchasing. The interest rate she has agreed to charge is 10% per year, annual loan payments, with 2 points. The lender will charge a 1% origination fee which you additionally plan to borrow in the loan.

a) What is the initial disbursement amount that you will receive? [Hint: must account for fees in initial loan balance]

b) What will be the total loan payment in the first year? Will this payment be the same for the remaining years?

c) What will be the interest payment in the third year?

d) What will be the outstanding loan balance at the end of the seventh year?

e) What is the IRR of the loan?

Answer 1

(a ): Initial disbursement amount= $4,900,000

(b ): Total loan payment in first year (yearly payment)= $821,864.24    (Excluding discount point of $100,000 paid on closing)

The yearly payment of $821,864.24 will continue in the remaining years

(c ): Interest payment in the third year= $438,458.51

(d ): Outstanding balance at the end of seventh year= $2,043,854.73

(e ): IRR of the loan= 10.707945%

Calculations as below: