Monthly payments in the first three years

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John obtained an adjustable rate mortgage (ARM) loan of $5 million for 25 years from a bank to purchase an apartment at Cheung Sha Wan four years ago. The mortgage interest rate was "Prime rate minus 2.6%", but in the first three years, John was allowed to pay a "teaser rate" of 1% only. Since the loan origination, the prime rate had not been changed over the last three years and it stood at 5.25%. However, payments after three years have to be adjusted sufficiently to fully amortize the loan at maturity.

a. Base on the "teaser rate", what were John's monthly payments in the first three years?

b. What was John's loan balance at the end of Year 3?

c. If the prime rate rose to 6% at the end of Year 3, and the interest rate has to be reset at the start of Year 4, what would John's new monthly payments be and what would the percentage rise in his monthly payments be?

Reference no: EM132525274

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