An investor is considering refinancing a property.The current mortgage has an interest rate of 8.75% and a mortgage balance equal to 45% of the property value due to amortization of the loan and some appreciation in value.However,the investor would like to refinance at an amount equal to 75% of the property value.He has found out that the property can be refinanced at a 75% loan-to-value ratio for 9.5% interest over 15 years.What can be said about the incremental cost of refinancing?

Question

Quizplus · Accepted Answer

The incremental cost of refinancing will be higher than 9.5% because the investor is increasing the loan amount from 45% to 75% of the property value, which means the new loan will include both the remaining balance of the old loan and additional borrowed funds. The cost of refinancing includes not only the interest rate but also the cost of borrowing additional funds, which increases the effective interest rate.

An Investor Is Considering Refinancing a Property