A borrower takes out a "hybrid mortgage loan" for $200,000 with monthly payments. This loan combines elements of fixed-rate mortgage (FRMs) for periods of 2 years, after whichinterest rates are reset and the loan becomes an adjustable mortgage (ARM). The amortization period is 30 years. The first two years of the loan have a "teaser" rate of 4%. After that, the interest rate can reset with a 2% annual interest rate cap. Assume that on the reset date, the composite rate (i.e., the market index plus the margin) is 5%. What would the Year 3 monthly payment be?
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