Reference no: EM132890351
Question - You want to borrow $200,000 for 20 years for the purchase of your new home. You have been offered the following adjustable rate mortgage:
Initial contract rate = 4%,
Index = 1-year Treasuries,
Payments adjusted each year,
Margin = 2%,
Periodic interest rate cap = 2%,
Lifetime cap = 6%,
Payment cap = none,
Negative amortization not allowed.
Discount points = 3.
The index to which the ARM is tied is forecast to be 6% at the end of year 1. You anticipate owning the house for two years.
Required -
a. Compute your monthly payments, interest and principal amortization payments, and end-of-year loan balances for the two-year period. Show your work and summarize your results by using a table that is similar to the following one.
b. If the ARM loan above is prepaid after 2 years, what would be the lender's yield (=borrower's cost of borrowing)? Show your work.