Question

You are looking to finance your home. The bank is offering a three-year ARM (adjustable-rate mortgage) with an introductory rate of 3.60%. It has a 3.00% adjustment cap per adjustment period, a lifetime adjustment of 7.00%. The rate is 4.00% over the one-year LIBOR rate, which is currently 1.35%.

a. What will your interest rate be after three years if the LIBOR rate does not change? (Round your answer to 2 decimal places.)

Interest rate %

b. In three years, what it the maximum interest rate you could be charged? (Round your answer to 2 decimal places.)

Interest rate %

c-1. If the LIBOR increases 1.50% per year for the next 10 years, up to 16.35%, what is the maximum interest rate you will pay? (Round your answer to 2 decimal places.)

Maximum interest rate %

c-2. When will that maximum interest rate take effect?

Ending of year 10

Beginning of year 10

Someone answered this question prior, however, some of the problems were answered incorrectly!

Thanks for mentoring!

Answer 1

.a LIBOR rate=1.35%

Calculated rate =4+1.35=5.35%

Adjustment cap=3%

Maximum rate after adjustment =3.6+3=6.60%

interest rate after three years=5.35%

Interest Rate after 3 years

5.35%

.b Maximum interest rate that can be charged after three years(first adjustment)=3.60+3=6.60%

Maximum interest rate that can be charged after 3 years

6.60%

.c1.If LIBOR increases to 16.35%

Calculated rate =4+16.35=20.35%

Lifetime adjustment =7%

Maximum interest rate that can be charged in lifetime =3.6+7=10.60%

Maximum Interest Rate Payable

10.60%

.c2 After Three Years:

LIBOR =1.35+1.5*3=5.85%

Calculated Interest =4+5.85=9.85%

Adjustment Cap=3

Interest Charged after 3 years =3.6+3=6.6%

After 4 years LIBOR rate=5.85+1.5=7.35%

Calculated rate =4+7.35=11.35%

Maximum Rate that can be charged =6.6+3=9.6%

Interest rate payable after 4 years=9.6%

After 5 years LIBOR Rate =7.35+1.5=8.85%

Calculated Rate =4+8.85%=12.85%

Interest rate cap=10.6%

Interest rate payable after 5 years on wards =10.60%

Maximum Rate will take effect after 5 years