Question

Assume that a lender offers a 30-year, $150,000 adjustable rate mortgage (ARM) with the following terms: Initial interest rate 7.5 percent Index one-year Treasuries Payments reset each year Margin 2 percent Interest rate cap 1 percent annually; 3 percent lifetime Discount points 2 percent Fully amortizing; however, negative amortization allowed if interest rate caps reached Based on estimated forward rates, the index to which the ARM is tied is forecasted as follows: Beginning of year (BOY) 2 7 percent; (BOY) 3 8.5 percent; (BOY) 4 9.5 percent; (EOY) 5 11 percent. Compute the payments, loan balances, and yield for the ARM for the five-year period.

Answer 1