Standard #: MA.912.F.3.10 (Archived Standard)


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Calculate the effects on the monthly payment in the change of interest rate based on an adjustable rate mortgage.


Remarks


Example: You would like to borrow $245,000 using a 30-year, 1-year ARM indexed to the 1-year Treasury security with a 2.75 percent margin and 2/6 caps (2 percent per year and 6 percent lifetime). The initial interest rate on this loan is 2.75 percent. The lender is charging you 1.50 points and $1,200 in miscellaneous fees to close the loan.

a) What is the initial payment on this mortgage?
b) If the 1- year Treasury security is yielding 2.25 percent at the first adjustment date, what is your payment on this loan during the second year?
c) Suppose that the 1-year Treasury is yielding 2.75 percent at the second adjustment
date. What is the new payment on this loan during the third year?
d) Assuming that you pay of the loan at the end of the third year, what yield did the lender earn on this loan?

Now resolve all four parts of the last problem assuming that the loan has a 20 percent payment cap instead of 2/6 interest rate caps.
a) What is the initial payment on this mortgage?
b) If the 1- year Treasury security is yielding 2.25 percent at the first adjustment date, what is your payment on this loan during the second year?
c) Suppose that the 1-year Treasury is yielding 2.75 percent at the second
adjustment date. What is the new payment on this loan during the third year?
d) Assuming that you pay of the loan at the end of the third year, what yield did the lender earn on this loan?



General Information

Subject Area: X-Mathematics (former standards - 2008)
Grade: 912
Body of Knowledge: Financial Literacy
Idea: Level 2: Basic Application of Skills & Concepts
Standard: Loans and Financing - Become familiar with and describe the advantages and disadvantages of short-term purchases, long-term purchases, and mortgages.
Date Adopted or Revised: 09/07
Content Complexity Rating: Level 2: Basic Application of Skills & Concepts - More Information
Date of Last Rating: 06/07
Status: State Board Approved - Archived

Related Courses

Course Number1111 Course Title222
1200500: Advanced Algebra with Financial Applications (Specifically in versions: 2014 - 2015 (course terminated))
7921022: Access Economics with Financial Literacy (Specifically in versions: 2014 - 2015, 2015 - 2018, 2018 - 2023, 2023 and beyond (current))


Related Resources

Lesson Plan

Name Description
Shopping for a Home Mortgage Loan

Students will analyze the data given to decide which type of loan they will buy. After selecting their options, students will estimate the first loan payment. FHA loans offer a better interest rate than conforming loans, but buying premium insurance is a requirement to qualify for an FHA loan, increasing the upfront cost of the loan. Fixed interest rate loans seem like the best choice because you have the same mortgage payment every month; however, adjustable rate loans offer a better interest rate and it has a cap on the interest rate.

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