Mortgage Payments & Potential risk

      Running Head: ACCOUNTING








Accounting 

Memo
TO: Mark sexton & Todd Story
FROM: 
DATE: June 14, 2007
SUBJECT: Mortgage Payments & Potential risk
The company is considering a mortgage of $35 million from the bank. For the payment it has 5 options available. The various options are focused on to minimize the interest payments from the company to a minimum and ensure adequate level of safety and minimize risk payments.
Option 1:
For mortgage payments either a traditional 30 year mortgage or a traditional 20 year mortgage could be analyzed. In the 30 year mortgage the company has to make an equal monthly payment of $232,728.24 for 30 years which will give the total interest payments during the life time of loan as $48,782,166.37. In the 20 year mortgage the company has to make equal monthly payments of $263,019.46 for 20 years which will give the total interest payments during the life time of loan as $ $28,124,671.23. Both of these loans have the minimum risk and elaborate the payment schedule with higher total interest payments (Warren, Reeve & Duchac, 2015).
Option 2:
In case of smart loans, the company has to make 2 equal monthly payment of $232,728.24 for 12.56 years. This will reduce the time of payments, keeping the interest amount at minimum by elaborating more frequent payments of one- half a month.
Option 3:
In case of bullet loan, the company has a bullet of 5 year that means the company has to make the bullet payment at the end of year 5.
Balloon Payment	$31,204,795.89 
Plus total payments till 5 years	13963700.40
Total	45168496.29
Interest expense	$10,168,496.29

Option 4:
In the case of interest only loan, the company has to pay total payments for 10 years which will accumulate the interest payments of 12,180,000.
Total interest payments	$12,180,000.00 

Recommendation:
If the minimum interest payments are considered, then balloon payments loan needs to be chosen by the company as it will minimize the payments and company also does not face the potential risk of high payments for longer periods or higher interest. During the initial risk the company is not exposed to higher interest or risk burden and once it stabilizes its operations, it can make the bullet payment of $31,204,795.89 (Warren, Reeve & Duchac, 2015).

 

References
Warren, C., Reeve, J. & Duchac, J. (2015). Financial & Managerial Accounting. Cengage Learning.