Question

Darrell Frye is planning to buy an office building at a cost of $988,000. He must pay 10% down and has a choice of financing terms. He can select from the following:

- 7%, 30-year loan and pay 4 discount points

- 7.25%, 30-year loan and pay 3 discount points

- 7.5%, 30-year loan and pay 2 discount points

Calculate his total outlay in points and payments after 4 and 10 years for each option. Which option is best for selling at 4 years and at 10 years?

Answer 1

Cost of building is $988,000, Down payment is $98,800 and Loan amount is $ 889,200.

Option	Loan	Interest rate	Tenure	Discount points	EMI	Cost of discount points
1	889,200	7%	30 years	4	$5,915.87	35,568
2	889,200	7.25%	30 years	3	$6,065.91	26,676
3	889,200	7.50%	30 years	2	$6,217.42	17,784

EMI = [P x R x (1+R)^N]/[(1+R)^N-1]

where P = Loan amount, R = interest rate and N = No.of installments

For calculating outstanding value of loan after n number of EMI use following formula

If it were to be sold after 4 years cash outflow from each of the options is as below

Option	Total EMI outflow (EMI * 48 months)	Priciple outstanding	Closure cost (discount points cost)	Total cash outflow
1	283,962	848,960	35,568	1,168,489
2	291,164	850,708	26,676	1,168,547
3	298,436	852,393	17,784	1,168,613

If he were to sell the property after 4 years option 1 7% interest with 4 discount points is good option, it has low overall cash outflow and low EMI.

If it were to be sold after 10 years cash outflow from each of the options is as below

Option	Total EMI outflow (EMI * 120 months)	Priciple outstanding	Closure cost (discount points cost)	Total cash outflow
1	709,904	763,044	35,568	1,508,516
2	727,909	767,472	26,676	1,522,057
3	746,090	771,781	17,784	1,535,655

If he were to sell the property after 4 years option 1 7% interest with 4 discount points is good option, it has low overall cash outflow and low EMI.

Please let me know in casse you have anyother question.