In: Finance
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
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% | ||