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What is the debt service payment amount

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Use the information below to answer the questions following.

Consider an adjustable rate mortgage (ARM) loan for $650,000. The interest rate is indexed to the 10-year Treasury yield. The loan has a margin of 2.75%, first-year teaser rate of 2.75%, an annual rate cap of 2% and a lifetime rate cap of 5%. The loan requires monthly payments for 25 years. Assume that 10-year Treasury yields are as shown below.

10-yr Treasury yield at first anniversary date(end of year 1)....... 3.5%

10-yr Treasury yield at end of second year 4.25%

a) What is the debt service payment amount during the first year of the loan, and the loan balance at the end of this first year?

b) What is the contract rate on the loan for the second year?

c) What is the debt service payment during the second year and the loan balance at the end of the year?

d) What are the contract rate, monthly payment and end-of-year loan balance for year 3?

Reference no: EM132505604

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