Consider a one-year, $150,000 ARM with a 30-year amortization period. The index rate is currently 3.75 percent and you estimate that it will increase by 25bp (0.25%) each year for the following 2 years. The fixed margin is 225bp (2.25%), but the lender is offering a teaser rate of 5 percent for the first year of the mortgage.

a) Calculate the contract rate, remaining loan balance, and monthly payment for each of the three years. 

b) Suppose that the ARM has a 1 percent annual adjustment cap and a 6 percent overall cap. What is the loan balance and monthly payment for each of the three years?