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Calculating new monthly payments for an ARM mortgage

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Please help with the following problem.

Kris and Chris are purchasing a home for $100,000. they are seeking a mortgage loan for $80,000 or 80% loan to cost. The bank offered them an ARM mortgage starting at 6% for the first year, the rate adjusts every year thereafter, and is amortized using a 30 year schedule. After 1 year the rate increases to 7%, what is the new payment?

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Solution Summary

Tthis posting helps with a basic algebra problem. The solution describes the steps to calculate new monthly payments for an ARM mortgage after one year.

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Please refer attached file for better clarity of tables.

Solution:

Loan Amount=P=100000*80%=$80000
Interest Rate=i=6%/12=0.50% per month
Number of periods=n=12*30=360
Monthly Payments=R=?

R=(P*i)/(1-1/(1+i)^n)
=80000*0.5%/(1-1/(1+0.5%)^360)
=$479.64
Installment # Loan Amount Rate of Interest Interest Total Due Amt Paid Balance
1 80000.00 0.50% 400.00 80400.00 479.64 79920.36
2 ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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