To calculate the payments for both scenarios, we need to consider the interest rate, loan amount, and loan term. Let's break down each part:
a. If the borrower makes interest-only payments for 3 years:
The loan amount is $212,000, the start rate is 5 percent, and the loan term is 30 years. However, during the initial 3 years, the borrower only needs to make interest-only payments.
To calculate the monthly payment, we can use the following formula for an interest-only loan:
Monthly Payment = (Loan Amount * Interest Rate) / 12
Monthly Payment = ($212,000 * 0.05) / 12
Monthly Payment = $8,833.33
Therefore, the monthly payments for the first 3 years, during the interest-only period, will be $8,833.33.
b. At the end of year 3, when the reset rate is 6 percent:
After 3 years, the reset rate increases to 6 percent, and the borrower must now make payments to fully amortize the loan over the remaining term.
To calculate the monthly payment for a fully amortizing loan, we can use the following formula:
Monthly Payment = (Loan Amount * Monthly Interest Rate) / (1 - (1 + Monthly Interest Rate)^(-Number of Payments))
First, we need to calculate the monthly interest rate:
Monthly Interest Rate = Annual Interest Rate / 12
Monthly Interest Rate = 6% / 12
Monthly Interest Rate = 0.06 / 12
Monthly Interest Rate = 0.005
Next, we calculate the total number of payments remaining, considering the original loan term of 30 years minus the initial 3 years:
Number of Payments = Remaining Years * 12
Number of Payments = (30 - 3) * 12
Number of Payments = 27 * 12
Number of Payments = 324
Now we can calculate the monthly payment:
Monthly Payment = ($212,000 * 0.005) / (1 - (1 + 0.005)^(-324))
Monthly Payment = $1,063.51
Therefore, after the reset rate at the end of year 3, the borrower's monthly payments will be $1,063.51 in order to fully amortize the loan over the remaining 27 years.