Daniel has just purchased a new home for $250,000. Daniel has obtained financing

Question

Daniel has just purchased a new home for $250,000.  Daniel has obtained financing for the new home from Federal Savings under a loan program designed for professionals who wish to purchase homes they cannot afford.  Under the terms of the loan, which is referred to as the 2/15 variable rate mortgage, Mr. Pasco will be permitted to borrow the full $250,000 purchase price of the home.  Although the "2/15" requires that Daniel pay off the loanover a 15 year period, the first 24 monthly mortgage payments are determined as if the loan were to be amortized (paid off) over 15 years at a monthly compounded rate of 3%.  At the end of two years (24 monthly payments), the interest rate on the loan will  be reset to a monthly compounded rate of 6.6%, with the outstanding balance of the loan to be paid off over the remaining term of the loan (13 years).  Assuming that Daniel makes his monthly payments as scheduled during the first two years of the loan term, determine

a. the initial montly payment on the loan

b. the new monthly payment at the end of two years if the interest rate on the loan is reset to a monthly compounded rate of 6.6 %

Explanation / Answer

Monthly mortgage payment for initial 24 months can be calculated in Excel as =PMT(3%/12,15*12,-250000). This is equal to $1726.45

After initial 2 years, the value of the outstanding principal can be calculated in Excel as =FV(3%/12,24,1726.45,-250000). This is equal to 222,791.08

Now this outstanding principal of 222,791.08 needs to be amortized over the next 13 years.

The monthly mortgage payment for the next 13 years can be calculated in Excel as =PMT(6.6%/12,13*12,-222791.08). This is equal to $2,131.07

So to summarize, the initial monthly payment for 2 years is $1,726.45 and the monthly payment for the next 13 years is $2,131.07

Hope this helped ! Let me know in case of any queries.

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