Vernon has obtained a $105,000, 5/1 30-year ARM at 5%. During the first 3 years, he has an option of paying interest only. If he accepts this offer, what would be his initial payment?
A) $756.92
B) $437.50
C) $587.50
D) $563.66
@thesmartone or anyone please help !?

Question

Vernon has obtained a $105,000, 5/1 30-year ARM at 5%. During the first 3 years, he has an option of paying interest only. If he accepts this offer, what would be his initial payment? 
A) $756.92
B) $437.50
C) $587.50
D) $563.66
@thesmartone or anyone please help !?

jim_thompson5910 · Answer

I'm not 100% sure, but I think you solve it like this

Annual Rate = 5% = 0.05
Monthly Rate = 0.05/12 = 0.00416666666667

Now multiply the monthly interest rate by the amount loaned out

0.00416666666667*105,000 = 437.5000000014

there is roundoff error and the amount is effectively $437.50