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Chapter 5, Solutions        Cornett, Adair, and Nofsinger

Now calculate the outstanding loan balance after the first 24 payments using equation 5-4:

Now use this amount for the present value, the new interest rate of 7% over the remaining 336 payments in equation to calculate the new payment amount after expiration of the teaser rate, using equation 5-9:

LG95-50 Teaser Rate Mortgage  A mortgage broker is offering a $279,000 30-year mortgage with a teaser rate.  In the first two years of the mortgage, the borrower makes monthly payments on only a 4.5 percent APR interest rate.  After the second year, the mortgage interest rate charged increases to 7.5 percent APR. What are the monthly payments in the first two years? What are the monthly payments after the second year?

Use equation 5-9 to calculate the payment using the teaser rate:

Now calculate the outstanding loan balance after the first 24 payments using equation 5-4:

Now use this amount for the present value, the new interest rate of 7.5% over the remaining 336 payments in equation to calculate the new payment amount after expiration of the teaser rate, using equation 5-9:

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