Question 22.59

29. In a 2/28 “hybrid” adjustable-rate mortgage (ARM), the initial interest rate is fixed for 2 years and then is adjusted every 6 months. (You usually pay “points” up front at closing in exchange for the “rate lock” for the first 2 years.) Suppose you buy a house with a $200,000 mortgage, with a 2/28 ARM with initial rate of 3%; and suppose that 2 years later, the interest rate goes up to 5%.

  1. What was your payment originally, at 3%?
  2. What is your new payment? (Hint: The amount of the loan is no longer $200,000, and you have only 28 years to pay it off.)

29.

(a) $843.21

(b) $1062.22, for an initial balance of $191,521.75