A group of investors would like to purchase a property. They are considering two financing alternatives.

The first option is Sh. 133 million, 30-year, fixed-rate mortgage at 5.75% interest and 1% origination fees. With this mortgage, the lender will require mortgage insurance which will cost Sh. 94,000 per month (this amount will be added to the monthly principal and interest payment). The mortgage insurance will be cancelled after 10 years, so that the added payment of Sh. 94,000 per month will not be required during years 11-30 of the loan.

The second option combines Sh. 112 million, 30-year, fixed-rate mortgage at 5.50% interest with a Sh. 22 million mortgage loan amortized over 10 years with a 7.25% interest rate. The origination fees associated with this financing will be Sh. 2,330,000.

The investors holding period is at least 30 years.

Required

Which of the two alternatives would you recommend? Explain. (25 marks)