Question

4. An ARM for $200,000 is made at a time when the expected start rate is four percent (4%). The loan will be made with a teaser rate of one percent (1%) for the first year, after which the rate will be reset. The loan is fully amortizing, has a maturity of 25 years, and payments will be made monthly.

a. What will be the monthly payments during the first year?

b. Assuming that the reset rate is three percent (3%) at the beginning of year (BOY) 2, what will payments be?

c. What if the reset date is three years after loan origination and the reset rate is four percent (4%), what will loan payments be beginning in year 4?

Answer 1

a) Monthly payment in year 1 = $753.74

Using financial calculator

Input

PV=200,000 ; N = 25*12=300; I/Y =1/12

Find PMT= -753.74

(b) Monthly payment in 2 year = $635.55

Loan balance at end of year 1=192922.68

Using financial calculator

Input

N=(25-1)*12=288

I/Y =1/12

PMT=- 753.74

Find PV= 192922.68

Monthly payment at EOY2 =940.52

Using financial calculator

Input

N=(25-1)*12=288

I/Y=3/12

PV=192922.68

Find PMT= - 940.52

C: Monthly payment in year 4 through year 25 = $1018.08

Loan balance at End of year 3 = 178554.04

N = (25-3)*12 = 264

I/Y = 1/12

PMT = -753.74

Find PV = 178554.04

Monthly payment at end of year 3

N=(25-3)*12=264

I/Y=4/12

PV= 178554.04

Find PMT= 1018.08