Tillman Bragg has just received a 15-year mortgage loan for his newly acquired Sundower Inn. The purchase was financed with an $8,000,000 loan with a stated quarterly interest rate of 2%. Payments are due every 3 months. Assume a marginal tax rate of 30%. The loan can be refinanced at the end of year five for 10 years as follows: 1) 7% annual rate 2) annual payments 3) closing costs of new financing equal 3% of new loan. Assume the closing costs are part of the new loan. 4) prepayment penalty of 0.5% of the balance due. This would also be part of the new loan.
Questions:
1) Prepare a loan repayment schedule for the first 5 years.
2) What is the total interest expense for this loan over 5 years?
3) What is the interest expense less the associated tax for year one?
4) What is the balance owed at the end of 5 years?
5) What would be the amount of the new mortgage if the property were refinanced at the end of 5 years?
6) What would be the annual mortgage payment if the property were refinanced?
7) Explain whether the property should be refinanced 5 years hence.