Question
4. The owner of an apartment building is contemplating refinancing her investment. The property is presently financed with a first mortgage loan that has existed
4. The owner of an apartment building is contemplating refinancing her investment. The property is presently financed with a first mortgage loan that has existed for eight years. The loan was written for $800,000 at the market interest rate current at the time. The term was set at 15 years and the loan called for constant annual payments sufficient to amortize the loan principal over the term.
The 20 suites in the apartment building are each rented for $1,200 per month and full occupancy income from parking is $20,000 per year. A reasonable vacancy allowance for apartments and parking is 2% of gross potential rental income and operating expenses are 41% of gross realized income.
The owner would like to keep this existing mortgage in place as the terms are favourable to her. To make use of the equity in the building, she is considering obtaining a second mortgage from the bank. Harry, the loan agent at the bank, has assigned a lending value of $1,100,000 to the building. The bank applies a loan-to-value ratio of 70% and a debt coverage ratio of 1.3.
The proposed second mortgage has a contract rate set 7% higher than the first mortgage rate. It calls for annual payments and a 7-year term and amortization period (to match the existing mortgage). Calculate the maximum amount of the second mortgage and the total amount of financing available to the property owner. (9 marks)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started