A mortgage broker is offering a $286,000 32-year mortgage with a teaser rate. In

Question

A mortgage broker is offering a $286,000 32-year mortgage with a teaser rate. In the first two years of the mortgage, the borrower makes monthly payments on only a 5.5 percent APR interest rate. After the second year, the mortgage interest rate charged increases to 8.5 percent APR.

What are the monthly payments in the first two years? What are the monthly payments after the second year? (Do not round intermediate calculations and round your final answer to 2 decimal places. Omit the "$" sign in your response.)

What are the monthly payments in the first two years? What are the monthly payments after the second year? (Do not round intermediate calculations and round your final answer to 2 decimal places. Omit the "$" sign in your response.)

Explanation / Answer

calculate the payment using the teaser rate

PMT384 = 286000 * [(0.055/12) / [1- 1/(1+ (.055/12))^384] = 1584.54

Now calculate the outstanding loan balance after the first 24 payments

PVA360 = 1584.54* [ [1- 1/(1+ (.055/12))^360] /(0.055/12) ] = 279071.97

Now use this amount for the present value, the new interest rate of 8.5% over the remaining 360 payments in equation to calculate the new payment amount after expiration of the teaser rate

PMT 336 = 279071.97 * [(0.085/12) / [1- 1/(1+ (.085/12))^360] =2145.82

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