You have decided to buy a 2,000 square-feet house in Grapevine, close to a good public school. The average price in the area is $150 per square feet. The bank will finance 80% of the house value, so you need savings for the 20% down payment.

You sign a 20 years 3/1 adjustable rate mortgage (ARM), which carries a 2.8% fixed rate for the first 3 years, and then (after 3 years) is adjusted to the 1-year LIBOR + 0.75 %.

Question: How much are your monthly payments after the third year (when the loan is renegotiated) if the LIBOR is 3%?

$1,429.2

$1,542.1

$1,406.8

$1,485.7

$1,307.1