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Purchase of a retail development

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You need to borrow $2,500,000 for the purchase of a retail development. You expect to sell the property after 5 years and have the following mortgage options:

a. A 30-year fixed rate mortgage at 8% with no points or prepayment penalties

b. A 30-year fixed rate mortgage at 7% with 3 points and a 1% prepayment penalty if repaid within the first 7 years

c. A 30-year adjustable rate mortgage with no points or prepayment penalty. Mortgage contract rates for loans of this size and risk are currently 6.75%. Rates are expected to rise to 7% in year 2, 7.25% in year 3, 7.75% in year 4, and 8% in year 5.

Which loan option gives you the lowest effective borrowing cost?

Reference no: EM132042391

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