Question
During February 2019, Tim financed the purchase of his new home by borrowing $325,000 from the X National Bank (RNB). Although he was offered a
During February 2019, Tim financed the purchase of his new home by borrowing
$325,000 from the X National Bank (RNB). Although he was offered a
conventional 30-year loan at a fixed rate of 4.5 percent, Tim chose RNB's variable
rate mortgage with an initial interest rate of 3.6 percent that is fixed for the first 4 years of the
loan term. The terms of the variable rate mortgage require Tim to pay off his loan
over 30 years. However, the first 48 monthly mortgage payments are determined as if the
loan were to be amortized (paid off) over 30 years at a fixed rate of 3.6 percent. At the end
of 4 years (48 payments) the interest rate on the loan will be reset to the market interest rate,
with the monthly mortgage payment being adjusted so that the outstanding balance of the
loan will be paid off over the remaining 26 years of the loan term. Assuming that an increase
in inflation forces the Federal Reserve to engineer a dramatic increase in interest rates, so that
during February 2023 the interest rate on Tim loan must be reset to 6.0 percent,
determine the amount of Tim new monthly payment when the interest rate on his
loan is reset in February 2023.
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