Question

Consider a $400,000, 30-year mortgage that is structured as a 10/20 interest only mortgage, with an annual rate of 3.5%. What would the payments be for the first 10 and the last 20 years?

Answer 1

When a loan is interest only mortgage, then the annual payment is made only for the interest and no amount towards pricipal is paid :

Thus, in the first 10 years, an yearly amount of $400,000 * 3.5% = $14,000 woulld be paid.

Amount paid in 10 years would be $14,000 * 10 = $140,000

Aftetr the 10 years, the loan would be intact at $400,000.

Let's calculate the yearly payment for this loan :

First let's calculate the yearly payment of mortgage :

PV of the yealy payments is equal to the value of mortgage. Thus, yearly payments are like annuity payments.

We will calculate the yearly payment value through the follwing formula :

PV = $400,000

i = 3.5%

n = 20 years

Putting values in the formula :

$400,000 = C * [(1-(1+3.5%)^-20) / 3.5%)

$40,000 = C* 14.21

C = $28,144.43

Amount paid for next 20 years would be = $28,144.43 * 20 = $562,888.61