Question

  A borrower with a negative amortization adjustable rate mortgage has a loan balance of $98,000 and 29 years remaining in the loan.  The current capped payment is $500, however the accrual rate is 6.5%. What will be the loan balance after twelve months?

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Answer 1

Fully amortizing monthly payment amount = PMT

N = 29 x 12 = 348; PV = -98,000; I/Y = 6.5% / 12 = 0.5417%; FV = 0; PMT = ??

Hence, Fully amortizing monthly payment amount = PMT (0.5417%, 348, -98000, 0) = 626.43

But the payment is capped @ 500

Hence, shortfall PMT = 626.43 - 500 = 126.43

This will accumulate. Hence, we need to find the FV after 12 months. Hence, now, use

N = 12; PV = -98,000; I/Y = 6.5% / 12 = 0.5417%; PMT = 126.43, FV = ??

Hence, the loan balance after twelve months = FV = FV (0.5417%, 12, 126.43, 98000) =  106,126.41