S&S Air Mortgage Case
1.What are the monthly payments for a 30-year traditional mortgage? What are the payments for a 20-year traditional mortgage? 30 Years
PVA = C({1 – [1/(1 [1/(1 + r)] t } / r) $35,000,000 = PMT{[1 – 1 1 / (1 + .061/12) 360] / (.061/12)} PMT = $212,098.17 20 Years
PVA = C({1 – [1/(1 [1/(1 + r)] t } / r) $35,000,000 = PMT{[1 – 1 1 / (1 + .061/12) 240] / (.061/12)} PMT = $252,774.2 Texas BAII Calculator Calculator 2. Prepare an amortization table for the first six months of the traditional 30-year loan. How much of the first payment goes toward principal? Years 1 2 3 4 5 6
Beginning Interest Principal Ending Balance Total Payment Payment Payment Balance 35000000 212098.17 177916.6667 34181.50333 34965818.5 34965818.5 212098.17 177742.9107 34355.25931 34931463.24 34931463.24 212098.17 177568.2715 34529.89854 34896933.34 34896933.34 212098.17 177392.7445 34705.42553 34862227.91 34862227.91 212098.17 177216.3252 34881.84477 34827346.07 34827346.07 212098.17 177039.0092 35059.16082 34792286.91
3. How long would it take for S&S Air to pay off the smart loan assuming 30-year traditional mortgage payment? Why is this shorter than th e time needed to pay off the traditional mortgage? How much interest would the company save? Payments Every two weeks, 52/2=26 Bi-weekly payment = $212,098.17 / 2 Bi-weekly payment = $106,049.09 PMT = PV x r (1 – 1/ 1/ (1+r) n) Solving for n yields:
n =ln (1 – PV x r/PMT) / ln (1 + r) In this case, the PMT is half of $212,098.17, or $106,049.09. r is the biweekly interest rate = 6.1% * 14/365 = 0.234%. n = ln (1 – ($35000000 x 0.234% / $106,049.09)) / ln (1 + 0.234%) = 632.97
It will take 633 biweekly periods or roughly 24.3 years (633/26). Less time is required because technically, the company is making 26 half-payments per year. Interest savings are the difference between total payments. 360 months x $212,098.17 = $76,355,341.20 633 biweekly periods x $106,049.09 = $67,129,073.97 Savings = $9,226,267.23
4. Assume S&S Air takes out a bullet loan under the terms described. What are the payments on the loan? What is the amount of the last payment of the loan? For the first 60 months, the payment will be the same as with the 30-yearfixed: $212,098.17. After that, the remaining bullet payment will be due, and according to Christie, is equal to the present value of the remaining principle of the loan: PV = PMT (1 – 1/(1+r) t) / r = $212,098.17 x (1 – 1/(1+0.061/12)36060)/(0.061/12) = $32,609,015. So both the 60th month payment ($212,098.17) and the remaining principle ($32,609,015.35) will be due. 5. What are the payments for the interest-only loan? For the first 10 years (120 months), the payment will be the monthly interest:
$35000000 x (3.5%/12) = $102,083.33. However, the final payment will include both the interest and the entire principle: $102,083.33 + $35000000 = $35,102,083.33 6. Which mortgage is the best for the company? Are there any potential risks in this action? Every Mortgage have its advantages and disadvantages, for example The 20 Year Fixed certainly is better than the 30 year fixed from the fact that it cost $26M less in total interest but the interest payments are almost 20% higher, if the company have enough cash flow to pay this amount, the 20 years will be ideal. But if the company want a more affordable option, they should consider the interest only loan, they would be allowed to optionally make principle payments; with an interest rate of 3.5%, they could still make the same payments as the 20- or 30-year fixed loan and make a much greater dent in their loan principle. The risk is that debt rates increase substantially during that period of time and s&s is unable to obtain financing then. The point of consideration of the bullet loan would if the 30-year fixed loan didn’t allow for early repayment, and S&S expected to be able to refinance
at a lower rate. From my perspective I would choose the interest-only loan because it has the lowest interest rate. One risk of the loan is that the company may not pay off the principal before maturity, which could mean it may refinance at a higher rate in the future.
