When you originally purchased an office apartment building exactly five years ago, you obtained a $710,000 loan which carried a 6.75% interest rate, annual (not monthly) payments and a 30-year amortization period. The loan has a 10-year maturity but carries no pre-payment penalty. The annual loan payment is $55,786.

According to your projections, the Net Operating Income in Year 6 will be $85,000 and the current Property Value is $970,000.

Since your loan doesnt mature for another five years, you have the option of keeping the loan in place. Nonetheless, youre considering refinancing.

(a) If you kept your existing loan, what would your leveraged cash flow be in Year 6?

(b). Assume that at the end of Year 5 your loan balance is exactly $665,017. Your lender offers to refinance your existing loan balance at the same 6.75% interest rate and the same 30-year amortization period as your original loan.

If you accepted this offer, what would your new loan payment and new leveraged cash flow be for Year 6? What percentage change does this represent over your original leveraged cash flow for Year 6? Show your work.

(c). As an alternative, your lender offers to originate a new loan with *ALL* the same terms as your initial loan five years ago: $710,000 loan amount, 6.75% interest rate, and 30-year amortization period.

The lender points out that this will allow you to extract all of the principal (about $45,000) youve paid down over the past five years so you can put it to use in other investments.

Upon hearing this your friend is weary. Doesnt extracting equity mean youre hurting the operating cash flow from your property? I dont see how you can put money in your pocket from a refinance without increasing your mortgage payment, they note.

To answer this calculate: (1) the loan payment and leveraged cash flow be for Year 6 if you took the lender up on their offer and (2) the percentage change (if any) above or below your original leveraged cash flow for Year 6. Show your work.

(d). Another bank offers to originate a new loan equal to 80% of the propertys value at a 6.25% interest rate and with a 30-year amortization period.

How much equity would this allow you to extract and by what dollar amount would your Year 6 Leveraged Cash Flow decrease? Show your work