Reference no: EM1312291

Computation of first three years schedule of loan

On October 1, Dagnay Taggart financed the purchase of a new home by borrowing $180,000 from the CTS Mortgage Services. Although Dagnay was offered a conventional twenty-year loan at a fixed rate of 6 5/8s percent, she chose CTS variable rate mortgage with an initial interest rate of 4.8 percent over the first three years. The requires that Dagnay pay off the loan over a twenty-year period. However, the first 36 monthly mortgage payments are determined as if the loan were to be amortized (paid off) over twenty years at a fixed rate of 4.8 percent. At the end of three years (36 monthly payments), the monthly payment will be reset so that the outstanding balance of the loan is paid off over the remaining term of the loan (17 years) at an interest rate equal to the yield on Treasury bills plus three percent. The yield on Treasury bills is currently 0.20 percent. However, most financial analysts expect the annual yield on Treasury bills to increase to 6.6 percent over the next three years as the economy recovers and the Federal Reserve moves to control a significant increase in inflation. Assuming that the yield on Treasury bills does in fact increase to 6.6 percent over the next three years, so the Dagnay is required to pay an interest rate of 9.6 percent when the interest rate on her loan is reset, determine the amount of Dagnay's new monthly payment at the end of three years.