A Mortgage Broker Is Offering a 30-Year Mortgage with a Teaser

Multiple Choice

A mortgage broker is offering a 30-year mortgage with a teaser rate. In the first two years of the mortgage, the borrower makes monthly payments on only a 5.5 percent APR interest rate. After the second year, the mortgage interest charged increases to 8.5 percent APR. What is the effective interest rate in the first two years? What is the effective interest rate after the second year?

A) 5.37 percent, 8.19 percent respectively
B) 5.50 percent, 8.50 percent respectively
C) 5.64 percent, 8.84 percent respectively
D) 12.60 percent, 12.66 percent respectively