Reference no: EM13199357
Question 1: An "interest only" mortgage is made for $80,000 at 10 percent interest for 10 years. The lender and borrower agree that monthly payments will be constant and will require no loan amortization.
a. What will the monthly payments be?
b. What will be the loan balance after 5 years?
c. If the loan is repaid after 5 years, what will be the yield to the lender?
d. Instead of being repaid after 5 years, what will be the yield if the loan is repaid after 10 years?
Question 2: An investor obtained a fully amortizing mortgage 5 years ago for $95,000 at 11 % for 30 years. Mortgage rates have dropped, so that a fully amortizing 25 year loan can be obtained at 10%. There is no prepayment penalty on the mortgage balance of the original loan, but three points will be charged on the new loan and other closing costs will be $2000. All payments are monthly.
a) Should the borrower refinance if he plans to own the property for the remaining loan term? Assume that the investor borrows only an amount equal to the outstanding balance of the loan.
b) Would you answer to part (a) change if he planned to own the property for only five more years?
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