Question

In: Finance

A borrower is offered a 30 year, fully amortizing ARM with an initial rate of 3.35%....

A borrower is offered a 30 year, fully amortizing ARM with an initial rate of 3.35%. After the first year, the interest rate will adjust each year, using 1 yr LIBOR as the index, plus a margin of 175bp. The price of the property is $8,000,000 and the loan will have an initial LTV ratio of 75% At the first reset date, 1 year LIBOR is at 3%. What is the borrower s payment during the 2nd year of the loan

Solutions

Expert Solution

Step 1: Calculating Monthly payment for first year of loan

Total loan = Initial balance of loan = LTV ratio x Price of property = 75% x 8000000 = 6000000

As payments for loan are made monthly, therefore

Initial monthly rate = Initial rate for year 1 / 12 = 3.35% / 12

Period of loan in months = 12 x period in years = 12 x 30 = 360 months

Now we can find the monthly payment of loan for first year using PMT function in excel

Formula to be used in excel: =PMT(rate,nper,-pv)

Using PMT function in excel, we get monthly payment of loan in first year or year 1 = $26442.811856

Step 2: Calculating Outstanding Balance after 1 year

We can find the Outstanding balance after 1 year with help of monthly payment calculated above.

Period of loan left after 1 year = 12 x no of years left = 12 x 29 = 348 months

Now we will use PV function in excel to calculate outstanding balance or loan balance after 1 year

Formula to be used in excel: =PV(rate,nper,-pmt)

Using PV function in excel, we get outstanding balance after 1 year = $5881883.6333

Step 3. Calculating monthly payment for second year

Interest Rate of year 2 = Libor + Margin = 3% + 175 bp = 3% + 1.75% = 4.75%

Monthly interest rate for year 2 =Interest Rate for year 2 / 12 = 4.75% / 12

Period of loan left in months = 12 x period of loan left in years = 12 x 29 = 348 months

We can find the monthly payment of loan in second year using PMT function in excel

Formula to be used in excel: =PMT(rate,nper,-pv)

Using PMT function in excel, we get monthly loan payment in second year = $31163.5663 = $31163.57 (rounded to two decimal places)

Monthly loan payment in second year of loan = $31163.57

jeff jeffy answered 4 months ago
Next > < Previous

Related Solutions

A borrower is offered a 30 year, fully amortizing ARM with an initial rate of 3.35%....
A borrower is offered a 30 year, fully amortizing ARM with an initial rate of 3.35%. After the first year, the interest rate will adjust each year, using 1 yr LIBOR as the index, plus a margin of 175bp. The price of the property is $8,000,000 and the loan will have an initial LTV ratio of 75% At the first reset date, 1 year LIBOR is at 3%. What is the borrower s payment during the 2nd year of the...
A borrower is offered a 30 year, fully amortizing ARM with an initial rate of 3.35%....
A borrower is offered a 30 year, fully amortizing ARM with an initial rate of 3.35%. After the first year, the interest rate will adjust each year, using 1 yr LIBOR as the index, plus a margin of 175bp. The price of the property is $8,000,000 and the loan will have an initial LTV ratio of 75% At the first reset date, 1 year LIBOR is at 3%. What is the borrower s payment during the 2nd year of the...
A borrower is offered a 30 year, fully amortizing ARM with an initial rate of 3.2%....
A borrower is offered a 30 year, fully amortizing ARM with an initial rate of 3.2%. After the first year, the interest rate will adjust each year, using 1 yr LIBOR as the index, plus a margin of 175bp. The price of the property is $8,000,000 and the loan will have an initial LTV ratio of 75% At the first reset date, 1 year LIBOR is at 3%. What is the borrower’s payment during the 2nd year of the loan?
1. Ann gets a 30 year 1/1 Fully Amortizing ARM for $1,000,000, with monthly payments and...
1. Ann gets a 30 year 1/1 Fully Amortizing ARM for $1,000,000, with monthly payments and monthly compounding. The initial rate is 3%. In the future, the rate will reset to 250 basis points above the LIBOR. There are no rate caps or floors. Suppose at the first reset, the LIBOR was 6%. What is the monthly mortgage payment for the second year? A. $4,216.04 B. $3,958.47 C. $7,585.95 D. $7,747.70 2. Sam bought a house that costs $1,000,000. Sam...
You took out a fully amortizing 30 year mortgage with the initial balance of $571,179. This...
You took out a fully amortizing 30 year mortgage with the initial balance of $571,179. This mortgage has a fixed interest rate at 5%. After you completed two full years of monthly payments, how much have you paid toward principal? Round your answer to the nearest cent (e.g. if your answer is $7000.9873, enter 7000.99).
You took out a fully amortizing 30 year mortgage with the initial balance of $199,755. This...
You took out a fully amortizing 30 year mortgage with the initial balance of $199,755. This mortgage has a fixed interest rate at 4%. After you completed two full years of monthly payments, how much have you paid toward principal? Round your answer to the nearest cent (e.g. if your answer is $7000.9873, enter 7000.99).
Ann is looking for a fully amortizing 30 year Fixed Rate Mortgage with monthly payments for...
Ann is looking for a fully amortizing 30 year Fixed Rate Mortgage with monthly payments for $4,500,000. Mortgage A has a 4.38% interest rate and requires Ann to pay 1.5 points upfront. Mortgage B has a 6% interest rate and requires Ann to pay zero fees upfront. Assuming Ann makes payments for 2 years before she sells the house and pays the bank the the bank the balance, which mortgage has the lowest cost of borrowing (lowest annualized IRR)
Ann is looking for a fully amortizing 30 year Fixed Rate Mortgage with monthly payments for...
Ann is looking for a fully amortizing 30 year Fixed Rate Mortgage with monthly payments for $4,500,000. Mortgage A has a 4.38% interest rate and requires Ann to pay 1.5 points upfront. Mortgage B has a 6% interest rate and requires Ann to pay zero fees upfront. Assuming Ann makes payments for 2 years before she sells the house and pays the bank the balance, which mortgage has the lowest cost of borrowing (ie lowest annualized IRR)? Type 1 for...
Ann got a 30 year Fully Amortizing FRM for $1,000,000 at an annual interest rate of...
Ann got a 30 year Fully Amortizing FRM for $1,000,000 at an annual interest rate of 7% compounded monthly, with monthly payments. After 5 years of payments, Ann can refinance the balance into a 25 year Fully Amortizing FRM at an annual interest rate of 6% compounded monthly, with monthly payments. Refinancing will cost Ann 1 point and $1,500 in closing costs. If Ann refinances into this loan after 5 years, what will be her total cost of refinancing? Answer...
A bank makes a 30-year fully amortizing FRM for $100,000 at an annual interest rate of...
A bank makes a 30-year fully amortizing FRM for $100,000 at an annual interest rate of 7% compounded monthly, with monthly payments. What is the market value of this loan five years later if the annual market interest rate for this loan drops to 4%? (Show your answer rounded to two decimal places.)
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT