Reference no: EM132666036
You are seeking financing for a $500,000 investment in an apartment building. The NOI in the first year is projected to be $35,000. The bank is willing to underwrite a fully-amortizing, 30 year fixed rate mortgage with constant monthly payments at an interest rate of 6%, compounded monthly.
Please note the following ratio:
Debt Coverage Ratio= Net Operating Income/ Annual Debt Service
The bank is willing to finance this investment if BOTH the following criteria are satisfied:
(i) The loan-to-value ratio of the mortgage is less than (or equal to) 75%
(ii) The Debt Coverage Ratio is greater than (or equal to) 1.5.
What is the largest mortgage you can obtain from the bank such that the above two criteria are satisfied? Assume that all other contract terms (interest rate of 6%, amortization term of 30 years, full amortization and monthly compounding) remain the same, even as you consider larger or smaller mortgages?
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