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Mortgages and interest payments

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Consider the following scenario: John buys a house for $135,000 and takes out a five year adjustable rate mortgage with a beginning rate of 5%. He makes annual payments rather than monthly payments.
Unfortunately for John, interest rates go up by 1% for each of the five years of his loan (Year 1 is 5%, Year 2 is 6%, Year 3 is 7%, Year 4 is 8%, Year 5 is 9%).
Calculate the amount of John's payment over the life of his loan. Compare these findings if he would have taken out a fix rate loan for the same period at 6.5%. Which do you think is the better deal?

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Solution Summary

The solution discusses mortgages and interest payments.

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1st option:
In my calculation, I am assuming every year new Equated Annual Instalment (EAI) is calculated.

1st year:
EAI = $3119; Principal amount paid: $2444; interest paid: $675; balance principal = $11056
2nd year:
EAI = $3191; Principal amount paid: $2528; interest paid: $663; balance principal = $8528
3rd ...

Solution provided by:
Amrit Lal Ahuja, PhD (IP)
Education
  • BEng, Allahabad University, India
  • MSc , Pune University, India
  • PhD (IP), Pune University, India
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