You are considering buying a house for $850,000. The required down payment is 20% and you can afford it, but the mortgage broker does not seem to be able to find a bank that will qualify you for a traditional mortgage based on your current income. However, one options is available a 3/27 loan where you will pay interest only for the first three years and then the payment will reset to amortize the loan to zero balance at maturity. This is an ARM (adjustable-rate mortgage) loan where the interest is fixed for the first three years at 4.75% annual rate, but will reset in three years to a rate, which is based on 10-year Treasury rate at that time and adjusted annually thereafter. After some research, you expect the rate on the mortgage to be 6.0% in three years.

Calculate:

1. Initial monthly payment on your mortgage

2. The expected change in your monthly payments in three years (in dollars and in percentages to initial payment)

3. Calculate the minimum annual household income (gross) required to qualify for initial mortgage and minimum annual household income to qualify for the mortgage payments in three years. Assume that the mortgage lender requires maximum debt payments not to exceed 32% of your gross income and that you have no other debts at this time.