Question

You would like to borrow $245,000 using a 30-year, 1-year ARM (adjustable rate mortgages) indexed to the 1- year Treasury security with a 2.75 percent margin and 2/6 caps (2 percent per year and 6 percent lifetime). The initial interest rate on this loan is 2.75 percent. The lender is charging you 1.50 points and $1,200 in miscellaneous fees to close the loan.

a) What is the initial payment on this mortgage?

b) If the 1-year Treasury security is yielding 2.25 percent at the first adjustment date, what is your payment on this loan during the second year?

c) Suppose that the 1-year Treasury is yielding 2.75 percent at the second adjustment date. What is the new payment on this loan during the third year?

d) Assuming that you pay off the loan at the end of the third year, what yield did the lender earn on this loan?

Resolve all four parts of the last problem assuming that the loan has a 20 percent payment cap instead of 2/6 interest rate caps.

a) What is the initial payment on this mortgage?

b) If the 1-year Treasury security is yielding 2.25 percent at the first adjustment date, what is your payment on this loan during the second year?

c) Suppose that the 1-year Treasury is yielding 2.75 percent at the second adjustment date. What is the new payment on this loan during the third year?

d) Assuming that you pay off the loan at the end of the third year, what yield did the lender earn on this loan?

Answer 1