Question

A borrower takes out a 25-year adjustable rate mortgage loan for $446,242 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 5%. What would the Year 3 monthly payment be?

Answer 1

The monthly payment for the first two years =PMT(rate,nper,pv) in excel =PMT(0.04/12,25*12,446242) = 2,355.43

Now, we construct the amortization table for the first two years as shown below:

Month	Payment	Interest	Principal	Outstanding
0				446242
1	$ 2,355.43	1487.473	$ 867.96	$ 4,45,374.04
2	$ 2,355.43	1484.58	$ 870.85	$ 4,44,503.19
3	$ 2,355.43	1481.677	$ 873.75	$ 4,43,629.44
4	$ 2,355.43	1478.765	$ 876.66	$ 4,42,752.78
5	$ 2,355.43	1475.843	$ 879.59	$ 4,41,873.19
6	$ 2,355.43	1472.911	$ 882.52	$ 4,40,990.67
7	$ 2,355.43	1469.969	$ 885.46	$ 4,40,105.21
8	$ 2,355.43	1467.017	$ 888.41	$ 4,39,216.80
9	$ 2,355.43	1464.056	$ 891.37	$ 4,38,325.42
10	$ 2,355.43	1461.085	$ 894.34	$ 4,37,431.08
11	$ 2,355.43	1458.104	$ 897.33	$ 4,36,533.75
12	$ 2,355.43	1455.113	$ 900.32	$ 4,35,633.44
13	$ 2,355.43	1452.111	$ 903.32	$ 4,34,730.12
14	$ 2,355.43	1449.1	$ 906.33	$ 4,33,823.79
15	$ 2,355.43	1446.079	$ 909.35	$ 4,32,914.44
16	$ 2,355.43	1443.048	$ 912.38	$ 4,32,002.06
17	$ 2,355.43	1440.007	$ 915.42	$ 4,31,086.63
18	$ 2,355.43	1436.955	$ 918.47	$ 4,30,168.16
19	$ 2,355.43	1433.894	$ 921.54	$ 4,29,246.62
20	$ 2,355.43	1430.822	$ 924.61	$ 4,28,322.02
21	$ 2,355.43	1427.74	$ 927.69	$ 4,27,394.33
22	$ 2,355.43	1424.648	$ 930.78	$ 4,26,463.54
23	$ 2,355.43	1421.545	$ 933.88	$ 4,25,529.66
24	$ 2,355.43	1418.432	$ 937.00	$ 4,24,592.66

So, the balance on the loan after 2 years = $424,592.66

Now, the monthly payment from year three will be at 5%

Monthly payment in year 3 =PMT(rate,nper,pv) =PMT(0.05/12,23*12,424592.66) = $2,591.74

Year 3 monthly payment = $2,591.74