Question by bromate: Is there a simple financial model that can evaluate construction bank loans that allow for…?
…Prime and LIBOR and fees ?
I have three banks competing for a hotel construction loan each is using different cost of funds: eg Prime plus 1/2 point; or LIBOR plus 2.25 points; and each has different loan fees attached.
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Answer by vnh n
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I don’t think there is a simple model, as both use a different base for their base cost.
However, Prime and LIBOR are different, but in general LIBOR is 2,25 lower than Prime. (has been since around 1990).
The loan fees, you can probably calculate, for the LIBOR and Prime, you could use the figures from last 10 years as a guide.
If rates rise drastically, Prime might become more interesting, as the difference between LIBOR and Prime becomes smaller at higher rates.
You can compare both at this site:
http://www.briefing.com/morningstar/mtgdata/prm_lbr.htm
So, I guess Prime +0.5 is 0.5 higher than LIBOR +2.25 if it is 3 month LIBOR you are talking about.
Also compare the fised periods, maximum rise or drop per period, and the fees.
It is a complex picture, but as long as you strick to the main lines, you’ll be able to figure it out. If not, don’t hesitate to PM me.