Company is offering home buyers a new mortgage instrument

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Reference no: EM13867905

Make Nu Mortgage Company is offering home buyers a new mortgage instrument called the Stable Home Mortgage. This mortgage is composed of both a fixed rate and adjustable rate component. Mrs. Maria Perez is interested in financing the purchase of a new home. The home, which costs $100,000, is to be financed by Stable Home Mortgages (SHM) on the following terms:The SHM requires a 5 percent down payment, costs the borrower 2 discount points, and allows 75 percent of the mortgage to be fixed and 25 percent to be adjustable. The fixed portion of the loan is for 30 years at an annual interest rate of 10.5 percent. Having neither an interest rate cap nor payment cap, the adjustable portion is also for 30 years with the following terms:

Initial interest rate = 9 percent

Index = 1-year Treasuries

Payments adjust each year

Margin = 2 percent

Interest rate cap = None

Payment cap = None

The projected one-year U.S. Treasury-bill index, to which the ARM is tied, as follows BOY2 = 10 percent; BOY3 = 11 percent; BOY4 = 8 percent; BOY5 = 12 percent.

Calculate Mrs. Perez's total monthly payments and end-of-year loan balances for the first five years. Calculate the lender's yield, assuming Mrs. Perez repays the loan after five years.

Repeat part (a) under the assumption that the initial interest rate is 9.5 percent and there is an annual interest rate cap of 1 percent.
1.    MakeNu Mortgage Company is offering home buyers a new mortgage instrument calledthe Stable Home Mortgage. This mortgageis composed of both a fixed rate and adjustable rate component. Mrs. Maria Perez is interested in financingthe purchase of a new home. The home,which costs $100,000, is to be financed by Stable Home Mortgages (SHM) on thefollowing terms:

a.    TheSHM requires a 5 percent down payment, costs the borrower 2 discount points,and allows 75 percent of the mortgage to be fixed and 25 percent to beadjustable. The fixed portion of theloan is for 30 years at an annual interest rate of 10.5 percent. Having neither an interest rate cap norpayment cap, the adjustable portion is also for 30 years with the followingterms:

Initialinterest rate = 9 percent

Index= 1-year Treasuries

Paymentsadjust each year

Margin= 2 percent

Interestrate cap = None

Paymentcap = None

The projected one-year U.S.Treasury-bill index, to which the ARM is tied, as follows BOY2 = 10 percent; BOY3 =11 percent; BOY4 = 8 percent; BOY5 = 12 percent.

Calculate Mrs. Perez'stotal monthly payments and end-of-year loan balances for the first fiveyears. Calculate the lender's yield,assuming Mrs. Perez repays the loan after five years.

b.    Repeatpart (a) under the assumption thatthe initial interest rate is 9.5 percent and there is an annual interest ratecap of 1 percent.

Reference no: EM13867905

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