Three years ago, you obtained a 10%, $6 million, monthly-payment mortgage with 20-year amortization and an eight-year maturity. (The loan thus matures five years from now, with a balloon payment.) This loan has a prepayment clause, but stipulates a three-point prepayment penalty on the outstanding balance. Today, it would be possible to obtain a similar mortgage at 8% interest with a one-point origination fee up front and 20-year amortization.

1. Assuming transaction costs would be $60,000, and the current value of the prepayment option in the old loan is $150,000, what is your NPV for paying off the old loan today?

2. If you could reduce the transaction costs to $50,000, should you pay the loan off immediately?

Answer rating: 100% (QA)

SOLUTION 1 To calculate the NPV of paying off the old loan today we need to compare the present valu... View the full answer