Loan Options help
Commercial Real Estate loan $1.9 million.

Closing on or before May 10th 2017.

Property is cashflowing at sale price, approx 10% CAP Rate. Given the current rate increase talks and financial environment which option would you choose? Why?


Term: Up to 10 years.

Repayment: Principal and interest due monthly amortizing on a 20 year schedule.

Interest Rate: Option 1: The rate shall be fixed for 5 years at the Federal Home Loan with [BANK] 5 year Fixed Rate Advance (“Index”) plus 2.10%. As of today, the interest rate would have been 4.37%. The rate will adjust at the 5 year anniversary at the same index and spread then in effect. At no point will the interest rate be less than 4.25%.

Option 2: The rate shall be fixed for 10 years at the Federal Home Loan __with BANK_______ 10 year Fixed Rate Advance (“Index”) plus 2.00%. As of today, the interest rate would have been 5.12%. At no point will the interest rate be less than 5.00%.

Lender will fix the rate 5 business days before closing.

Fees: A .50% Lender fee will be paid to the Lender plus all out of pocket costs.


Thanks in advance!
[{"id": "dewqsx4", "text": "What does your model say?  ", "replies": [{"id": "dewyas6", "text": "A model isn't gonna predict how these indices move. OP you basically have to decide based on the deal's margin for risk and your personal expectations in the market. If you think rates are going to jump significantly (and it would have to be quite significant to counterweigh a cheaper rate for the first 5 years) in the next 5 years take the LT fixed option. \n\nWhat you *could* model is what the breakeven is, i.e. how much would the option 1 pricing have to jump at the 5 year mark for them to end up costing the same - and then ask yourself how likely you think that is.", "replies": [{"id": "dex3b6i", "text": "thank you for the response! That breakeven point is exactly what i'm trying to calculate but i'm not the numbers person i thought i was. \nDo you start with the Fixed at 5 years on the amortization schedule, then work backwards with the interest rate for the Variable?   I'm not confident in my modeling capabilities.\n\nThank you for the advice!\n\n", "replies": [{"id": "dex42i2", "text": "yea, if you have an amortization calculator in Excel, you can use the 'goal seek' option to show you what the new interest rate would have to be to match the total interest on the fixed rate loan.  \nEdit: I get a break even rate of 5.9198% assuming 360/actual days interest accrual.  \nEdit 2:  \nSo (interest for 10 years at 5.12%) = ((interest at 5 years at 4.37%) + (interest at 5 years at 5.9198%))", "replies": [{"id": "dex8gx3", "text": "Oh man! i was doing that way wrong! Thank you for your guidance!\n\nSo my real Question I need to answer is; Do i think interest rates are going to go up ~160 pts in the next five years.  \n\nGuess i'll get out my Crystal ball....\n\nMUCH Appreciated!", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "dexb4xv", "text": "Any prepay?", "replies": [], "depth": 1}, {"id": "dez162h", "text": "Did you get any quotes from any non bank lenders?", "replies": [], "depth": 1}]