Question

Suppose that you are considering taking out an adjustable-rate mortgage with the following terms: Amount borrowed:...

Suppose that you are considering taking out an adjustable-rate mortgage with the following terms:

Amount borrowed: $500,000

Index rate: Prime Rate (Currently 8.0%)

Margin: 250 basis points.

Periodic cap: 1.5 percentage points

Lifetime cap: 5 percentage points

Amortization: 30 years

If the interest rate changes at the end of every year and the prime rate falls to 7.50% during the first year, what will your monthly payment be in year 2? Assume that the lender will use monthly compounding.

Question options:

a. $4,390.30

b. $4,839.33

c. $4,214.69

d. $4,917.14
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