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. Assuming that a fully amortizing loan is made.

A) What is the loan balance at the end of year 1? (Choose the nearest value)

a.

$235,000
b.

$246,930
c.

$265,890
d.

$232,013

B) What is the monthly payment during year 2?

a.

$1,498.88
b.

$1,670.25
c.

$1,956.23
d.

$1,827.15

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

a.

$1,834.41
b.

$1,250.00
c.

$1,498.88
d.

$1,666.67

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