A borrower takes out a 30-year adjustable rate mortgage loan for $200,000 with monthly payments. The first two years of the loan have a "teaser" rate of 4%, after that, the rate can reset with a 5% annual payment cap. On the reset date, the composite rate is 6%. What would the Year 3 monthly payment be?

Question

Quizplus · Accepted Answer

The initial monthly payment at 4% is calculated first. After two years, the payment can increase by a maximum of 5% due to the cap, even though the composite rate is 6%. Therefore, the Year 3 payment is 5% higher than the initial payment, resulting in $1,003.

A Borrower Takes Out a 30-Year Adjustable Rate Mortgage Loan