Problem:
Ms. Madison has an existing loan with payments of $782.34. The interest rate on the loan is 10.5% and the remaining loan term is 10 years. The current balance of the loan is $57,978.99. The home is now worth $120,000 and Ms. Madison would like to borrow an additional $30,000 through a wraparound loan which would increase the debt to 487,978.99. Terms of the wraparound loan are 12.25% interest with monthly payments for 10 years.
Required:
What is the incremental cost of borrowing the extra $30,000 through a wraparound loan?
- 15.47%
- 11.38%
- 12.96%
- 13.41%
Note: Please show how to work it out.