Question

A customer would like to take out a 25-year adjustable rate mortgage loan for $260,000 with...

A customer would like to take out a 25-year adjustable rate mortgage loan for $260,000 with monthly payments. The first two years of the loan have a “teaser” rate of 4%, after that, the rate can reset with a 2% annual rate cap. On the reset date, the composite rate is 6%. What would the Year 3 monthly payment be?

$955

$1,567

$1,655

$1,586

Because of the rate cap, the payment would not change.

Homework Answers

Answer #1

Solution :

Here,

First we need to calculate the monthly payment as follows :

We use PMT function in Excel to calculate the monthly payment as

Monthly payment =PMT(RATE,NPER,PV,FV)

=PMT(4%/12,25*12,-260000,0)

= $1,372.38

Secondly, calculate the loan balance at the end of year 2

Hence, the no. of years will be ( 25 - 2 ) i.e., 23 years.

Here,

We use PV function in Excel to calculate the price at the end of year 2 as

=PV(RATE,NPER,PMT,FV)

=PV(4%/12,23*12,-1372.38,0)

= $247,386.91

Price at the end of year 2 is $247,386.91

Now,

Calculate the monthly payment at the end of year 3 as follows :

Here,

We use PMT function in Excel to calculate the monthly payment as

Monthly payment =PMT(RATE,NPER,PV,FV)

=PMT(6%/12,23*12,-247386.91,0)

= $1,654.64 ( or ) 1,655 (Rounded off)

Therefore,

The monthly payment at the end of year 3 is $1,655

The answer is option (3) i.e., $1,655

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
A borrower takes out a 30-year adjustable rate mortgage loan for $500,000 with monthly payments. The...
A borrower takes out a 30-year adjustable rate mortgage loan for $500,000 with monthly payments. The first year of the loan has a “teaser” rate of 3%, after that, the rate can reset with a 7% annual payment cap. On the reset date, the composite rate is 5%. What would be the Year 2 monthly payment be? Please show how to solve using a financial calculator.
A borrower takes out a 25-year adjustable rate mortgage loan for $540,000 with monthly payments. The...
A borrower takes out a 25-year adjustable rate mortgage loan for $540,000 with monthly payments. The first 5 years of the loan have a “teaser” rate of 4%, after that, the rate can reset with a 3% annual rate cap. On the reset date, the composite rate is 6%. What would the Year 6 (after 5 years; 20 years left) monthly payment be? Group of answer choices A) $3,369.84 B) $3,407.02 C) none of the answers is correct D) $3,235.05...
Gilbert takes out a 23-year adjustable rate mortgage loan for $6,000,000 with monthly payments. The first...
Gilbert takes out a 23-year adjustable rate mortgage loan for $6,000,000 with monthly payments. The first two years of the loan have a “teaser” rate of 2%, after that, the rate can reset with a 2% annual rate cap. On the reset date, if the composite rate is 7%, what would the Year 3 monthly payment be? a) $31,467.8 b) $32,768.6 c) $35,812.3 d) $42,327.9
You take out a $325,000 thirty-year mortgage amortized loan. The interest rate is 6% with monthly...
You take out a $325,000 thirty-year mortgage amortized loan. The interest rate is 6% with monthly payments of $1948.54. What is the principal portion of your first payment?
18)   Suppose that you are thinking about taking out an adjustable rate loan (ARM) with the...
18)   Suppose that you are thinking about taking out an adjustable rate loan (ARM) with the following information:               Teaser Rate: 3.5%        Margin: 4.0%        Year 1 TSY Strip Index: 2.0% Year 2 TSY Strip Index: 3.5% Year 3 TSY Strip Index: 1.5% Periodic Cap: 1.0% Lifetime Cap: 5.0% Caps are NOT based off of the Teaser a) What is the interest rate in the 1st year of the loan? 3.5% 5.5% 6.0% 7.5%          B) What is...
Five years ago you took out a 5/1 adjustable rate mortgage and the five-year fixed rate...
Five years ago you took out a 5/1 adjustable rate mortgage and the five-year fixed rate period has just expired. The loan was originally for $291,000 with 360 payments at 4.1% APR, compounded monthly. a. Now that you have made 60 payments, what is the remaining balance on the loan? b. If the interest rate increases by 1.2%, to 5.3% APR, compounded monthly, what will your new payments be?
You are given that the teaser rate on a 1/1 ARM is 2.50%. The mortgage has...
You are given that the teaser rate on a 1/1 ARM is 2.50%. The mortgage has a margin of 2% above 1-year CMT, subject to a rate cap 5/2/5. Answer the following questions: (i) What is the maximum rate the mortgage can reset to on its first reset date? (ii) The CMT is 2% at the time of the first reset and at the time of the second reset it goes to 3.5%. What would the rate reset to for...
You would like to borrow $245,000 using a 30-year, 1-year ARM (adjustable rate mortgages) indexed to...
You would like to borrow $245,000 using a 30-year, 1-year ARM (adjustable rate mortgages) indexed to the 1- year Treasury security with a 2.75 percent margin and 2/6 caps (2 percent per year and 6 percent lifetime). The initial interest rate on this loan is 2.75 percent. The lender is charging you 1.50 points and $1,200 in miscellaneous fees to close the loan. a) What is the initial payment on this mortgage? b) If the 1-year Treasury security is yielding...
10. Five years ago you took out a 5/1 adjustable rate mortgage and the five-year fixed...
10. Five years ago you took out a 5/1 adjustable rate mortgage and the five-year fixed rate period has just expired. The loan was originally for $ 250,000 with 360 payments at 5 % APR, compounded monthly. a. Now that you have made 60 payments, what is the remaining balance on the loan? b. If the interest rate increases by 1 %, to 6 % APR, compounded monthly, what will be your new payments?
You just obtained a $325,000 adjustable rate mortgage (ARM) with 30 year amortization and a 3...
You just obtained a $325,000 adjustable rate mortgage (ARM) with 30 year amortization and a 3 year reset period. Your starting interest rate for the loan is 3% and you believe that your rate in 3 years will rise to 3.75%. If you are correct, what will be your new mortgage payment at the start of the 4th year (i.e., right after the reset period)? a. $1,407.96 b. $1,493.53 c. $1,281.75 d. $1,370.21
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT