Consider a $225,000 5-1 ARM amortized over 30 years with monthly payments. The loan is indexed to
Question:
Consider a $225,000 5-1 ARM amortized over 30 years with monthly payments. The loan is indexed to the 1-year constant maturity Treasury security with a 3 percent margin and 2-6 caps (2 percent annually and 6 percent lifetime. The initial interest rate on this loan is 4.5 percent.
a) What is the initial monthly payment on this loan?
b) How much will the borrower still owe on this loan at the first adjustment date (the end of the 5th year)?
c) Suppose that the yield on the 1-year T-Bill is 3.5 percent at the first adjustment date. What will the next payment be on the loan after it adjusts?
d) If the yield on the 1-year T-Bill is 2.75% at the next adjustment date, what will be the new payment on the loan at that time?
e) Suppose that the borrower must pay two points in conjunction with this loan and expects to hold it for seven years. What is the loan’s effective borrowing cost (EBC)?