Question
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
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.
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.
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)
Q. 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? Explain intuitively the reason why your monthly payment went up or down relative to your calculation in part c.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started