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You have an ARM loan with $200,000 with 30 years with payment cap yeat over at 5%. The teaser rate is 2.5%, monthly payment. Assume that the mortgage rate afjust to 5% in year 2. 1. what is the monthly payment for year 1? 2. what is the monthly payment for year 2? 3. assume that negatuve amortization is allowed, what is the ending balance at year 2?

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Jane plans to borrow from a bank to finance her investment in a real estate project. She considers an ARM loan with three-year loan term, $100,000 loan amount. The loan has the following terms: 1) initial interest rate = 8.5%; 2) margin = 3%; 3) loan amortization period = 15 years; 4) frequency of adjustment = 1 year (monthly compounding); 5) interest rate cap = none; 6) payment cap = none; and 7) discount points = 3%; 8) no negative amortization is allowed. The index rates (i.e., based on 3 year treasure rate) for next two years (i.e., the 2nd and 3rd year) are expected to be 11% and 8%, respectively.

(a) If the loan will be repaid after 3 years, what would be the monthly payment and the ending loan balance for each of the three years?

(b) What is the effective mortgage yield for borrowing this mortgage?

(c) Now suppose that there is an annual interest rate cap of 2% specified in the loan contract. What is the effective mortgage yield for borrowing this mortgage, assuming that no negative amortization is allowed?

(d) Now suppose, instead of the annual interest rate cap of 2%, the bank prefers a 3% annual payment cap. Assume that negative amortization is allowed, what is the effective mortgage yield for borrowing this mortgage?

Variable Rate Mortgage Quiz

Jeff's Mortgage Company is offering you a 30 year, $200,000 variable rate mortgage with an introductory rate of 5% for the first year (12 months). Interest rates for the following years pegged at 2 over the 1-year LIBOR rate prior to the new year. Jeff is using the following LIBOR rates to calculate your interest.

1 yr. LIBOR rate year

7% 2

5% 3

#1. What is the monthly payment for year 1?

#2. What is the monthly payment for year 2?

#3. What is the monthly payment for year 3?

#4. What is the balance on this loan at the end of 3 years (36 payments)?

#5. How much interest was paid to Vulcan during the first 3 years (36 payments) at this loan?

You decide to get an ARM loan for $200,000 for 30 years startingat 5.00% with the interest rate adjustment of 2% annual cap and 9%lifetime ceiling. Let's say, based on the inflationary economy,your loan interest rate is projected to increase 2% annually forthe next 5 years. What would be your projected monthly payment forthe 4th year of your loan?

a. $1,344.26

b. $1,558.32

c. $1,632.59

d. $1,646.25

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