Question 22.60

30. In a 5/1 “hybrid” adjustable-rate mortgage (ARM), the initial interest rate is fixed for 5 years and then is adjusted annually. (You usually pay “points” up front at closing in exchange for the “rate lock” for the first 5 years.) Suppose that you buy a house with a $200,000 mortgage with a 5/1 ARM with initial rate of 4%; suppose that 5 years later, the interest rate goes up to 6%.

  1. What was your payment originally, at 4%?
  2. What is your new payment? (Hint: The amount of the loan is no longer $200,000, and you have only 25 years to pay it off.)