MA.912.F.3.10Archived Standard

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?