A borrower has an interest-only mortgage with a 10-year interest-only period followed by a 20-year amortization period. If the original loan amount was $400,000 at 5% interest, what will be the approximate monthly payment during the amortization period, assuming no principal payments were made during the interest-only period?
Correct Answer
B) $2,640
During the interest-only period, no principal is paid, so the full $400,000 must be amortized over the remaining 20 years. Using standard amortization calculations at 5% interest over 20 years, the payment would be approximately $2,640. This demonstrates the payment shock risk inherent in interest-only mortgages.
Why This Is the Correct Answer
During the interest-only period, no principal is paid, so the full $400,000 must be amortized over the remaining 20 years. Using standard amortization calculations at 5% interest over 20 years, the payment would be approximately $2,640. This demonstrates the payment shock risk inherent in interest-only mortgages.
More Mortgage Knowledge Questions
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