Question: A basic ARM is made for $250, 000 at an initial interest rate of 6% for 30 years with an annual reset date. The borrower

A basic ARM is made for $250, 000 at an initial interest rate of 6% for 30 years with an annual reset date. The borrower believes that the interest rate at the beginning of year 2 will increase to 8 percent.

a. Assuming that a fully amortizing loan is made. What is the monthly payment during year 2?

b. What would be the monthly payments in year 2 if it is an interest-only ARM loan for the first two years?

c. Assuming that fulling amortizing is made and negative amortization is allowed if payment cap reached. If the ARM loan has a maximum 5% annual increase payment cap, what is the monthly payment during year 2?

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