You need to borrow $2,500,000 for the purchase of a retail development. You expect to sell the property after 5 years and have the following mortgage options:
a. A 30-year fixed rate mortgage at 8% with no points or prepayment penalties
b. A 30-year fixed rate mortgage at 7% with 3 points and a 1% prepayment penalty if repaid within the first 7 years
c. A 30-year adjustable rate mortgage with no points or prepayment penalty. Mortgage contract rates for loans of this size and risk are currently 6.75%. Rates are expected to rise to 7% in year 2, 7.25% in year 3, 7.75% in year 4, and 8% in year 5.
Which loan option gives you the lowest effective borrowing cost?