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Five years ago, you borrowed $280,000 to purchase a new duplex in north scottsdale
Five years ago, you borrowed $280,000 to purchase a new duplex in north scottsdale. at the time you were able to finance it with a 5/1 ARM (fully amortizing over 30 years) that will reset to a higher interest rate in year 6. when you made the purchase, you put 25% down and financed the remainder. the initial interest rate was 4.8%. once the fixed portion was completed, the rate would adjust annually to LIBOR plus 3%.
1. what is the loan balance at the end of year 5?
2. if LIBOR rate at the end of the year 5 was 3.25%, what would be your payment beginning in year 6?
Expert Solution
If we read the question properly, we find that the loan amount is 280,000 which is 75% of the purchase cost
The purchase cost= 100/75*280,000= 373,333
The net amount borrowed= 280,000
EMI for 280,000 at interest rate of 4.8% fully amortized over 30 years= 1469 ( As per EMI table)
The amount outstanding at the end of 5th year= 256,382
Now considering 256,382 as outstanding amount
Rate of interest= LIBOR+%= 3.25+3=6.25%
Repayment period= 25 years
EMI for 256,382 at 6.25% fylly amortized over 25 years= 1,691 (As per EMI table)
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