Question

You are buying a $1,250,000 property, financing it with an 75% loan-to-value ratio, adjustable rate mortgage with a teaser rate of 2.95%. At the end of the first year, the mortgage loan rate adjusts to 3.875%. The loan has a 5 percent payment cap. You expect the property to appreciate 5% each year. 30 year loan/360 months.

What is the teaser payment?

What is the outstanding balance on the 1-year reset date?

How much principal and interest was paid in the first year?

Given the reset interest rate, what is the uncapped payment?

How much higher (in percent) is the fully amortizing payment?

If the payment is capped, what is the new payment?

If the payment is capped, what is the negative amortization after the next year?

Neglecting selling expenses, what is the return on equity after the second year?

Answer 1

1. Teaser paymnet is the first minimal amount of payment which is made against the loan. The loan is 75% loan to value. Which means 75% of the value of property is issued as loan. Thus, the loan amount is:

Teaser rate is 2.95%, thus the teaser payment will be:-

  

Answer is $27,656.25

2. The outstanding balance at the end of one year will be calculated by deducting the Total payments of one year from loan amount. This will be calculated as below:-

Total payment of first year =

  

Thus, outstanding balance at the end of first year is:-

Thus, the answer is $890,625

3. The total amount paid in first year is $890,625

Out of this amount, the interest payment is $27,656.25 calculated in part 1.

THus, remaining principle payment is:

  

Thus, interest payment in year 1 is $27,656.25 and principle payment is $862,968.75

4. Outstanding loan is $890,625 calculated in part 2.

The reset interest rate is 3.875% on outstanding loan which is:

The payment cap is 5% of outstanding loan which is:

The uncapped amount is the balance of payment cap and interest payments.

  

Thus, the answer is $10,019.53