Question $2$: Forecasting ARM rates Question $3$: Impact of interest rate caps

In this question you will consider the same adjustable$-$rate mortgage from Question $2$ with the addition

of interest rate caps.

What is the interest rate of the loan in year $2,$ assuming it has an annual rate cap at $1\%$ and a

lifetime cap at $7\%?$

a$.$ Year $1$

b$.$ Year $2$

c$.$ Year $3$

What is the outstanding loan balance at the end of year $2$ of the adjustable$-$rate mortgage with an

annual rate cap at $1\%$ and a lifetime cap at $7\%?$

Finally, to reflect on the calculations, compare and contrast the monthly payments and outstanding loan

balances in year $2$ for each mortgage. Understand the importance of rate caps and reflect on scenarios

when rate caps could save you a lot of money! Question $2$: Forecasting ARM rates

Adjustable$-$rate mortgage amortized over $30$ years, with an LTV of $80\%$ and a $4\mathrm{.}50\%$ teaser rate. The

margin rate for this loan is $3\mathrm{.}15\%,$ and the index rate is $4\mathrm{.}00\%.$ Assume the index rate increases to $4\mathrm{.}30\%$

at the beginning of year $3.$ Early repayment charges apply within the first $3$ years of the loan at $2\%$ of the

outstanding balance. The property you're looking at is priced at $$800,000($ignore acquisition fees$).$

What is the interest rate on this loan in the following years:

a$.$ Year $1$

b$.$ Year $2$

c$.$ Year $3$

To fill in the table, calculate the monthly payment and the outstanding loan balance of the ARM at

the beginning of year $1,$ year $2$ and year $3.$

Calculate the repayment charges if the property was sold after $2$ years.

Adjustable$-$rate mortgage amortized over $30$ years, with an LTV of $80\%$ and a $4\mathrm{.}50\%$ teaser rate. The margin rate for this loan is $3\mathrm{.}15\%,$ and the index rate is $4\mathrm{.}00\%.$ Assume the index rate increases to $4\mathrm{.}30\%$ at the beginning of year $3.$ Early repayment charges apply within the first $3$ years of the loan at $2\%$ of the outstanding balance. The property you$$re looking at is priced at $$800,000($ignore acquisition fees$).$

$1.$ What is the interest rate on this loan in the following years:

a$.$ Year $1$

b$.$ Year $2$

c$.$ Year $3$

$2.$ To fill in the table, calculate the monthly payment and the outstanding loan balance of the ARM at the beginning of year $1,$ year $2$ and year $3.$

Beginning of Year $1$ Beginning of Year $2$ Beginning of Year $3$

Loan Balance

Monthly Payment

$3.$ Calculate the repayment charges if the property was sold after $2$ years.

Question $3$: Impact of interest rate caps

In this question you will consider the same adjustable$-$rate mortgage from Question $2$ with the addition of interest rate caps.

$1.$ What is the interest rate of the loan in year $2,$ assuming it has an annual rate cap at $1\%$ and a lifetime cap at $7\%?$

a$.$ Year $1$

b$.$ Year $2$

c$.$ Year $3$

$2.$ What is the outstanding loan balance at the end of year $2$ of the adjustable$-$rate mortgage with an annual rate cap at $1\%$ and a lifetime cap at $7\%?$

Beginning of Year $1$ Beginning of Year $2$ Beginning of Year $3$

Loan Balance

Monthly Payment

Finally, to reflect on the calculations, compare and contrast the monthly payments and outstanding loan balances in year $2$ for each mortgage. Understand the importance of rate caps and reflect on scenarios when rate caps could save you a lot of money!