Michele Sadie is ready to meet with Mark Bal, the loan officer for Wells Fargo. She is asking to borrow $12 million for her company. The meeting is to discuss the mortgage options available to the company to finance the new facility.

Mark begins the meeting by discussing a 30-year mortgage. The loan would be repaid in equal monthly installments. Because of the previous relationship between Sadie Manufacturing and the bank, there would be no closing costs for the loan. Mark states that the APR of the loan would be 5.5 percent. Ms. Sadie asks if a shorter mortgage loan is available. Mark says that the bank does have a 20-year mortgage available at the same APR.

Mark also suggests a bullet loan, or balloon payment, which would result in the greatest interest savings. At Micheles prompting, he goes on to explain a bullet loan. The monthly payments of a bullet loan would be calculated using a 30-year traditional mortgage. In this case, there would be a 5-year bullet. This would mean 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 60^th payment, the bullet payment would be due. The bullet payment is remaining principal of the loan. Ms. Sadie then asks how the bullet payment is calculated. Mark tells her 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.

Michele has also heard of an interest-only loan and asks if this loan is available and what the terms would be. Mark says that the bank offers an interest-only loan with a term of 10 years and an APR of 4.25 percent. He 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 $12 million. However, the company can make principal payments at any time. The principal payments would work just like those on a traditional mortgage. Principal payments would reduce the principal of the loan and reduce the interest due on the next payment.

Michele is still unsure of which loan she should choose. She has asked you to answer the following questions to help her choose the correct mortgage.

What are the monthly payments for a 30-year traditional mortgage?

What are the payments for a 20-year tradition mortgage?

Prepare an amortization table for the first six months of the traditional 30-year loan. How much of the sixth payment is interest?

What are the payments for the interest-only loan?

Which mortgage is the best for the company? Are there any potential risks in this action?