Question

A borrower takes a cash-out to refinance for 80% of the existing property value. The property is currently valued at $250,000, and the outstanding amount of the existing mortgage is $60,000. The new loan will be a 2/1 ARM with an initial interest rate of 2.625% and a 30-year term. The first two years will require only interest payments. What is the total amount in $dollars that the borrower will pay in interest during the first two years of the loan? Round to two decimals.

Answer 1

Existing property value = 250000

Cash out to refinance for 80% of property value.

So new mortgage amount = 250000*80% = 200000

Initial ínterest rate for 2 years = 2.625%

Monthly interest on loan for interest only period = loan amount * Interest Rate/number of month in year

=200000*2.625%/12

=437.5

Total month in 2 year = 2*12= 24

Total amount paid in first 2 years = monthly payment (ínterest)*number of total months

=437.5*24

=10500

So that the borrower will pay $10500 in interest during the first two years of the loan