Question

A borrower takes out a 28-year adjustable rate mortgage loan for $451,185 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

Answer :

Calculation of monthly payment amount :

We have,

Rate = 4% / 12 = 0.0033333

Nper = 28 * 12 = 336

PV = - 451,185

FV = 0

By using PMT function in Excel, we get

Monthly payment = PMT(Rate,Nper,PV,FV) = PMT(0.0033333,336,-451185,0)

Monthly payment = $2,234.32

Now,

calculation of loan payment at the end of year 2 :

Here, the no.of years will be ( 28 - 2 ) 26 years.

We have,

Rate = 4% / 12 = 0.0033333

Nper = 26 * 12 = 312

PMT = - 2,234.32

FV = 0

By using PV function in Excel, we get

= PV(rate,nper,pmt,fv) = PV(0.00333333,312,-2234.32,0)

The price at the end of year 2 = $4,32,966.64

Finally, Calculation of the monthly payment at the end of year 3 :

We have,

Rate = 5% / 12 = 0.004166667

Nper = 26 * 12 = 312

PV = - 4,32,966.64

FV = 0

By using PMT function in Excel, we get

= PMT(rate,nper,pv,fv) = PMT(0.004166667,312,-432966.64,0)

Therefore,

The monthly payment at the end of year 3 = $2,482.39