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What would the libor index have

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Question - Please help me to understand the calculations of this problem. If a borrower received a 30-year ARM mortgage loan for $200,000. Rate caps are 3/2/6. The start rate is 3.50% and the loan adjusts every 12 months for the life of the mortgage. The index used for this mortgage is LIBOR (for this exercise, 3.00% at the start of the loan, 4.45% at the end of the first year, and 4.50% at the end of the second year). The margin on the loan is 3.00%, which remains the same for the duration of the loan.

Does this mean that the initial start rate is 3.5 % plus the 3.0 % (3/2/6) would be 6.5% but because of the LIBOR would the start rate be 4.45 % for the first year (because it is lower than the 6.5 %) What calculations would I use for the second year to figure the fully indexed rate. Would the maximum interest rate for the 30 year term loan be 9.5% because 6 percent is the maximum for the term of the loan?

If the interest rate is at its maximum, what would the LIBOR index have to be to reach the maximum interest rate?

Reference no: EM132748881

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