Question

In: Finance

Sharon borrows an adjustable rate loan (ARM) of $100,000 with 3 year loan maturity. The initial...

Sharon borrows an adjustable rate loan (ARM) of $100,000 with 3 year loan maturity. The initial interest rate for the loan is 8.5%, the margin is 3%, the loan amortization period is 15 years, the frequency of adjustment is 1 year (monthly compounding), There will be a discount point of 3% for the loan. Also, the index rates for the next 2 years are 11% and 8%, respectively. NOW suppose there is an annual interest rate cap of 2% specified in the loan contract, what will be the effective mortgage yield for borrowing this loan? Assume that no negative amortization is allowed. a.) 11.85% b.) 11.42% c.) 12.08% d.) 11.12% I got C wrong with my calculation. Please can you show me the work. Thank you

Solutions

Expert Solution

loan amt $                         1,00,000.00
Int rate 8.50%
Margin 3%
Interate rate for the calc 11.50% 8.5%+3%
no. of yrs 15
Discount points 3% this has to be added to the loan amount to arrive at the adjusted loan amount if no discount were given
Interest cap rate 2%
Monthly compounding 12 multiple factor
Discount points in USD $                               3,000.00 100,000*3%
Loan amt adjusted in USD $                         1,03,000.00 Discount points added to the loan amt
Payment per month $                               1,203.24 pmt=?,r= 11.5%/12, n=15*12,pv=103000
Monthly rate 1.0040% rate=?, n=15*12,pv=100000 (actual loan amt)
Yearly rate 12.048% 1%*12
Actual Mortgage Yeild is 11.429% Cost incurred annually towards interest rate
0.9525% (1+12.048%)^(1/12)-1
11.429% 0.952%*12
Option b. 11.42%

Related Solutions

Consdier an adjustable rate mortagage (ARM) loan for 650,000. The interest rate is indexed to the...
Consdier an adjustable rate mortagage (ARM) loan for 650,000. The interest rate is indexed to the 10-year Treasury yield. The loan has a margin 2.75%, first-year teaser rate of 2.75%, an annual rate cap of 2% and a lifetime rate cap of 5%. The loan requires monthly payments for 25 years. Assume that 10-year Treasury yields are as shown blow. 10-yr treasury yield at first anniversary date (end of year 1) 3.5% 10-yr treasury yield at the end of second...
An Adjustable Rate Mortgage (ARM) is made for $300,000 at an initial interest rate of 2...
An Adjustable Rate Mortgage (ARM) is made for $300,000 at an initial interest rate of 2 percent for 30 years. The ARM will be adjusted annually. The borrower believes that the interest rate at the beginning of the year (BOY) 2 will increase to three percent (3%). a. Assuming that the ARM is fully amortizing, what will monthly payments be during year 1? b. Based on (a) what will the loan balance be at the end of year (EOY) 1?...
Alex Dunphy borrows $26,000 to pay for her Caltech’s tuition. The adjustable rate loan carries a...
Alex Dunphy borrows $26,000 to pay for her Caltech’s tuition. The adjustable rate loan carries a 6% annual percentage rate for the first 5 years. After that the rate will be adjusted downward to 3% annually to reflect market conditions. The loan term is 20 years and payments are made monthly. What is the monthly payment after interest rate resets to 3%?
George secured an adjustable-rate mortgage (ARM) loan to help finance the purchase of his home 5...
George secured an adjustable-rate mortgage (ARM) loan to help finance the purchase of his home 5 years ago. The amount of the loan was $250,000 for a term of 30 years, with interest at the rate of 9%/year compounded monthly. Currently, the interest rate for his ARM is 5.5%/year compounded monthly, and George's monthly payments are due to be reset. What will be the new monthly payment? (Round your answer to the nearest cent.)
A floting rate mortgage loan is made for $100,000 for a 30-year period at an initial...
A floting rate mortgage loan is made for $100,000 for a 30-year period at an initial rate of 12 percent interest. However, the borrower and lender have negotiated a monthly payment of $800.00 What will the loan balance at the end of year 1? What if the interest rate increases to 13 percent at the end of year 1? How much interest will be accrued as negative amortization in year 1 if the payments remains at $800? Year 5?
A floating rate mortgage loan is made for $100,000 for a 30-year period at an initial...
A floating rate mortgage loan is made for $100,000 for a 30-year period at an initial rate of 12 percent interest. However, the borrower and lender have negotiated a monthly payment of $800. (a)What will be the loan balance at the end of year 1? (b) What if the interest rate increases to 13 percent at the end of year 1? How much interest will be accrued as negative amortization in year 5 if the payment remains at $800?
3. A borrower is unsure whether to go with a fixed rate or adjustable rate loan....
3. A borrower is unsure whether to go with a fixed rate or adjustable rate loan. What kind of questions would you ask to help them decide?
Assume that the lender offers a 30-year, $150,000 adjustable rate mortgage (ARM) with the following terms:...
Assume that the lender offers a 30-year, $150,000 adjustable rate mortgage (ARM) with the following terms: Initial Interest Rate = 7.5% Index = one-year Treasuries Payments reset each year Margin = 2% Interest rate cap = 1% annually; 3% lifetime Discount points = 2% Fully amortizing; however, negative amortization allowed if interest rate caps reached. Based on estimated forward rates, the index to which ARM is tied forecasted as follows: Beginning of year BOY2 = 7%; BOY3 = 8.5%' BOY4...
At the time of origination, the expected yield on an adjustable rate mortgage (ARM) should be...
At the time of origination, the expected yield on an adjustable rate mortgage (ARM) should be less than that of a Fixed Rate Mortgage. Discuss.
You are looking to finance your home. The bank is offering a three-year ARM (adjustable-rate mortgage)...
You are looking to finance your home. The bank is offering a three-year ARM (adjustable-rate mortgage) with an introductory rate of 3.40%. It has an adjustment cap of 3.00% per adjustment period with a lifetime adjustment of 8.00%. The rate is 4.00% over the one-year LIBOR rate which is currently 1.25%. What will your interest rate be after three years if the LIBOR rate does not change? (Round your answer to 2 decimal places.) In three years, what is the...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT