You are considering an ARM with the following characteristics:

Mortgage amount $=$ $$480,000\mathrm{.}00$

$2/6$ Interest rate caps

Margin $=2\mathrm{.}5$

Index $=1$ year TB yield

Term $=30$ years

One$-$year adjustable

Monthly Payments

Discount points $=5$

Initial Teaser Rate $=5\%$

Prepayment penalty $=5\%$ for the first three years

All subsequent adjustments are made from the Teaser Rate

Suppose the TB yield $4\mathrm{.}75\%$ at the outset of the loan, and the TB yield is $5\mathrm{.}25\%$ at the end of year one. Suppose that, at the end of year two, the index is $5\mathrm{.}5\%$ and stays constant for the remaining life of the loan.

If the loan is repaid at the end of year two, what is the effective cost?

Answer rating: 100% (QA)

To calculate the effective cost of the loan at the end of year two we need to consider the various components of the adjustablerate mortgage ARM and t... View the full answer