Mark decides to ask Christie about a smart loan he discussed with a mortgage broker when he was refinancing his home loan. A smart loan works as follows. Every two weeks a mortgage payment is made that is exactly one half of the traditional monthly mortgage payment. Christie informs him that the bank does have smart loans. The APR of the smart loan would be the same as the POR of the traditional loan. Mark nods his head. He then states this is the best mortgage option available to the company since it saves interest payments.
Christie agrees with Mark, but then suggests that a bullet loan, or balloon payment, would result in the greatest interest savings. At Todd's prompting, she 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 30year mortgage for the first five years, but immediately after the company makes the 60th payment, the bullet payment would be due. The bullet payment is the remianing principal of the loan. Chris then asks how the bullet payment is calculated. Christie tells him that the remaining principal can be calculated using an amortization, but it is also the present value of the remaining 25 years of mortgage payments for the 30-year mortgage.
Todd has also heard of an interest-only loan and asks if this loan is available and what the terms would be. Christie says that the bank offers an interest-only loan with a term of 10 years and an APR of 3.5%. She 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 $22 million. However, the company can make principal payments at any time. The principal payments would work just like those on a traditional mortgage. Prinicpal payments owuld reduce the principal of the loan and reduce the interest due on the next payment.
1. What are the monthly payments for a 30 year traditional mortgage?
What are the payments for a 20 year traditional mortgage?
4. Assume S&S takes out a bullet loan under the terms described.
What are the payments on the loans?
5. What are the payments on the interest only loans?