You just took out a variable-rate mortgage on your new home. The mortgage value is $100,000, the term is 30 years, and initially the interest rate is 8%. The interest rate is fixed for five years, after which time the rate will be adjusted according to prevailing rates. The new rate can be applied to your loan either by changing the payment amount or by changing the length of the mortgage.
a Assuming annual payments, what is the original annual mortgage payment?
b Prepare an amortization schedule for the first five years. What will be the mortgage balance after five years?
c If the interest rate on the mortgage changes to 9% after five years, what will be the new annual payment that keeps the termination time the same?
d Under the interest change in part (c), what will be the new term if the payments remain the same?