David is considering an adjustable rate mortgage loan with the following characteristics: 

• Loan amount: $250,000 

• Term: 30 years 

• Index: one year T-Bill 

• Margin: 2% 

• Periodic cap: 2% 

• Lifetime cap: none

 • Negative amortization: not allowed 

• Financing costs: 1 discount point and $5,500 in origination fees. 

The Treasury bill yield is 6% at the outset and is expected to increase to 8% at the beginning of the second year and to 13% at the beginning of the third year. If David prepays the loan at the end of the third year, what is the ARM’s effective borrowing cost?

Answer rating: 100% (QA)

Index for 1 st year6 second year 8 and for 3 rd year13 Margin ... View the full answer