Question

Solve using excel:

A. You have taken out a $225,000, 3/1 ARM. The initial rate of 5.8% (annual) is locked in for 3 years and is expected to increase to 6.5% at the end of the lock period. Calculate the initial payment on the loan. (Note: the term on this 3/1 ARM is 30 years) 


B. Given the following information, calculate the Effective Borrowing Cost (EBC). Loan amount: $175,000, Term: 30 years, Interest rate: 7 %, Payment: $1,164.28, Discount points: 1, Origination fee: $3,250. Assume the loan is held until the end of year 10.

C. Suppose you have taken out a $200,000 fully-amortizing fixed rate mortgage loan that has a term of 15 years and an interest rate of 4.25%. In month 2 of the mortgage, how much of the monthly mortgage payment does the principal repayment portion consist of? 


Answer 1

A)We taken out a $225,000, 3/1 ARM.

The initial rate of 5.8% (annual)

Locked in for 3 years and is expected to increase to 6.5% at the end of the lock period.

Given	Present value	2,25,000
	Face value	0
	Interest rate	5.80%
	Interest rate per month	0.0048333
	Term	30 years
	Total months(30*12)	360
	PMT	₹ -1,320.19

b)Calculation of Effective Borrowing Cost

Loan amount: $175,000, Term: 30 years, Interest rate: 7 %, Payment: $1,164.28,

Discount points: 1 means it is $1,750. Origination fee: $3,250.

Total upfront cost =($1,750+$3,250)=$5,000

Total Loan Amount=$175,000+$5,000 =$180,000

Interest rate =7%. So amount of interest= ($180,000*7%)=$12,600

Effective rate of interest = ($12,600/175,000*100)= 7.2%

C)

Given	Present value	2,00,000
	Face value	0
	Interest rate	4.25%
	Interest rate per month	0.00354167
	Term	15 years
	Total months(15*12)	180
	PMT	₹ -1,504.56
	Loan Balance after a month
	N(180-1)	179
	Interest	4.25%
	PMT	₹ -1,504.56
	Face value	0
	Present value	1,99,204
	PMT	₹ -1,504.56
	Interest	706
	Principal	799

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