It is 2017, and you work in finance for a large international media company. Your firm took out a $400m amortizing fixed-rate commercial mortgage on your U.S. corporate headquarters three years ago. The coupon rate on the mortgage is 5.25%, and the loan initially had a 25 year amortization period, and a 10 year balloon payment. (Note: Since three years have passed, this balloon payment will now occur in seven years time). Mortgage payments are monthly.

After a boozy lunch with some Wall Street mortgage bankers, your boss tells you that he has heard financing is easily available now, and that it would be possible to obtain new fixed-rate commercial mortgage financing on the corporate headquarters at a lower interest rate of 4%. He tells you to look into the costs and benefits of refinancing the existing mortgage to take advantage of the lower market interest rates.

Looking at the mortgage contract, you notice that in order to refinance, you will be required to defease the existing mortgage. Assume that current long term Treasury yields are 3%, and the yield curve is flat. Also assume that if you refinance now, the new mortgage would have the same initial contract terms as the loan you currently have (i.e. 25 year term, 10 year balloon payment)

Assuming you refinance the mortgage in a way that involves a zero up-front net cash payment. In other words, when you refinance, you borrow exactly as much as it costs to defease the old mortgage. Under this approach, what would be your new monthly payments?

Given this answer from part d, do you recommend defeasing the loan to take advantage of the lower market rates? Are there any considerations that come into play other than a simple comparison of the monthly payments?