The initial monthly payment on the loan

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Reference no: EM13809767

Daniel Pascoe has just purchased a new home for $350,000. Mr Pascoe has obtained financing for the new home from Lenapah Federal Savings under a loan program designed for professionals who wish to purchase homes they cannot afford. Under the terms of the loan, referred to as 3/25 variable rate mortgage, Mr. Pascoe will be permitted to borrow the full $350,000 purchase price of the home. Although the “3/25” requires that Mr. Pascoe pay off the loan over a 25-year period, the first 36 monthly mortgage payments are determined as if the loan were to be amortized (paid off) over 25 years at a monthly compounded rate of 3.6 percent. At the end of three years (36 payments), the interest rate on the loan will be reset to a monthly compounded rate of 7.2 percent, with the outstanding balance of the loan to be paid off over the remaining term of the loan (22 years). Assuming that Mr. Pascoe makes his monthly payments as scheduled during the first three years of the loan term, determine

a. the initial monthly payment on the loan

b. the new monthly payment at the end of three years if the interest rate of the loan is reset to a monthly compounded rate of 7.2 percent.

Reference no: EM13809767

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