Consider a 1/1 ARM loan at the very beginning of its second year. The loan was initially a $275,000, 30-year loan with an 8.2% initial rate. Going into the second year, the loan’s rate rises to 9.5%/year.

(a) Calculate what the monthly payment will now be in the absence of any payment or interest-rate caps.

(b) Suppose that the payment cap is 8% per year. In other words, payments can only increase by 8% per year, maximum. In the presence of this cap, what will the monthly payment be for year 2?

(c) Does the capped payment result in negative amortization? Calculate the payoff balance that will exist at the end of month 24, right after the 24th payment is made.

(d) Suppose that the rate had actually increased to 10.1% at the beginning of the second year. Does the capped payment now result in negative amortization? Calculate the payoff balance that will exist at the end of month 24, right after the 24th payment is made, with this higher assumed rate.

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Monthly payment is calculated using PMT function of Excel Mortgage amount is the PV periodical i... View the full answer