Please answer the question and give the process of calculation A borrow takes ou
ID: 2794631 • Letter: P
Question
Please answer the question and give the process of calculation
A borrow takes out a 7-year interest-only mortgage loan for 500,000 with monthly payments. The first two years of the loan have a “teaser” rate of 2%, after that, the rate can reset annually with 2% annual and 6% lifetime caps. On the first reset date, the fully indexed rate is 5%. What would be the monthly payment in the third loan year?
A because of the increase rate cap, the monthly payment would not change
B 1,667
C 2,083
D 2,500
Explanation / Answer
For the first two years the inerest on loan will be 2%
From the third year the interest rate will be 5% ( as it was clearly given that fully indexed rate is 5% assuming it includes reset rate)
the monthly interest for third year (3rd) will be 2083 (rounded off)
500000*5%*1/12= 2083.333
It was assumed that the interest is simple interest as nothing said about compounding of interest.