Question

An ARM is made for $150,000 for 30 years with the following terms:
Initial interest rate = 3%
Index = 1-year Treasuries
Payments reset each year
Margin = 2 percent
Fully amortizing
Interest rate cap = 1 percent annually; 3 percent lifetime
Estimated forward rates:
BOY 2	4.00%
BOY 3	5.25%
BOY 4	6%
BOY 5	6.50%
Compute payments and balances for each of the years 1-5.

Answer 1

Given,

Initial rate= 3%

Index= 1 year Treasury rate . Margin =2%. Reset frequency= yearly

Interest cap : Annual 1% and life time 3%

Index for Year 2= 4%. Therefore,

Interest rate for year 2= Minimum of (4%+2% = 6%, Previous rate of 3% + Annual cap of 1% =4%, Initial rare of 3%+ Lifetime cap of 3%= 6%)= 4%

Index for Year 3= 5.25%. Therefore,

Interest rate for year 3= Minimum of (5.25%+2% = 7.25%, Previous rate of 4% + Annual cap of 1% =5%, Initial rare of 3%+ Lifetime cap of 3%= 6%)= 5%

Index for Year 4= 6%. Therefore,

Interest rate for year 4= Minimum of (6%+2% = 8%, Previous rate of 5% + Annual cap of 1% =6%, Initial rare of 3%+ Lifetime cap of 3%= 6%)= 6%

Index for Year 5= 6.5%. Therefore,

Interest rate for year 5= Minimum of (6.5%+2% = 8.5%, Previous rate of 6% + Annual cap of 1% =7%, Initial rare of 3%+ Lifetime cap of 3%= 6%)= 6%

Year 1: Monthly payments= $ 632.41 Balance at the end= $146,868.30

Year 2: Monthly payments= $713.74 Balance at the end= $144,128.27

Year 3: Monthly payments= $797.86 Balance at the end= $141,705.38

Year 4: Monthly payments= $884.22   Balance at the end= $139,538.10

Year 5: Monthly payments= $884.22   Balance at the end= $137,237.14

Details of calculation as below: