Question

The index for year one is 6%, the margin is 2%, the lifetime cap is 6%, the annual cap is 2%, and the first- year-only teaser is 1%.

What is the first year contract rate? 6%, 7%, 8%, 12%?

The maximum interest rate allowable during the life of the mortgage is? 12%, 13%, 14%, there is no maximum?

Answer 1

Answer for the first question

what is the first year contract rate ?

Answer is 7%

Explanation: Index rate given for year 1 is 6% and Margin is 2% . That together makes the interest rate offered by financial institution is 8% (6%+2%) and the first year only teaser rate is 1%

Teaser rate loans are offered by financial institutions to lure customers to take loans and teaser should be reduced from interest rate . that makes it 7% (8%-1%).

and second question is what is th maximum mortage rate ?

Answer : 14%

Explanation: life time cap given in the question is 6%

Life time cap rate is given at the time of commencement of loan to make aaware buyers that the maximum rate charged by them during life time what ever the market interest rate changes and it is generally shown as increase of percentage from present interest rate

and together makes it 14% interest rate (6%+2%)+life time cap 6%