B&T Mortgage Loan

B&T Air was founded 10 years ago by friends Donald Biden and Joe Trump. The company has manufactured and sold light airplanes over this period, primarily to individuals who own and fly their own planes. You have been hired by B&T Air to help the company with obtaining a mortgage to finance a purchase of a bigger manufacturing facility which will cost $35 million. You are now ready to assist Donald and Joe at the meeting with the loan officer (Ms Hilary Obama) for Sang Heng bank. The meeting is to discuss the mortgage options available to the company to finance the new facility.

Hilary begins the meeting by discussing a 30-year mortgage. The loan would be repaid in equal monthly instalments. Because of the previous relationship between B&T Air and the bank, there would be no closing costs for the loan. Hilary states that the APR of the loan would be 6.1 percent. Joe asks if a shorter mortgage loan is available. Hilary says that the bank does have a 20-year mortgage available at the same 6.1 percent APR.

Donald asks Hilary about a "smart loan" he discussed with a mortgage broker when he was refinancing his home loan. A smart loan works as follows: every two weeks a mortgage payment is made that is exactly one-half of the traditional monthly mortgage payment. Hilary informs him that the bank does have smart loans. The APR of the smart loan would be the same as the APR of the traditional loan: 6.1 percent. Donald points out that this is the best mortgage option available to the company because it saves interest payments.

Hilary agrees with Donald, but then suggests that a bullet loan would result in the greatest interest savings. Donald and Joe ask her to tell them more about the bullet loan. Hilary explains that the monthly payments of the bullet loan would be calculated using a 30-year traditional mortgage. In this case, there would be a 5-year bullet. This means that the company would make the mortgage payments for the traditional 30-year mortgage for the first five years, but immediately after the company makes the 60th payment, the bullet payment would be due. The bullet payment is the remaining principal of the loan. Donald asks how the bullet payment is calculated. Hilary tells him that the remaining principal can be calculated using an amortization table, but it is also the present value of the remaining 25 years of mortgage payments for the 30-year mortgage.

Joe also heard of an interest-only loan and asks if this loan is available and what the terms of such loan would be. Hilary says that the bank offers an interest-only loan with a term of 10 years and an APR of 3.5 percent. She goes on to further explain the terms. The company would be responsible for making interest payments each month on the amount borrowed. No principal payments are required. At the end of the 10-year term, the company would repay the $35 million.

Donald and Joe are satisfied with Hilary's answers, but they are still unsure of which loan they should choose. They have asked you to find information (see task 1 to 6 below) which will help them choose the correct mortgage. Your answers have to be submitted in writing, be neat, coherent, and include all corresponding calculations.

Tasks

1. Calculate the monthly payments for a 30-year traditional mortgage and the monthly payments for a 20-year traditional mortgage.
2. Prepare an amortization table for the first six months of the traditional 30-year mortgage. Calculate how much of the first payment goes toward the principal.
3. Calculate how long would it take (in years) for B&T Air to pay off the smart loan assuming 30-year traditional mortgage payments. Clearly explain why is this shorter than the time needed to pay off the traditional mortgage.
4. Assume B&T Air takes out a bullet loan under the terms described by Hilary. Calculate the payments (including the last one) on the loan.
5. Calculate the payments for the interest-only loan.
6. Which mortgage is the best for the company and why is that? Are there any potential risks of taking this mortgage?