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An ARM is made for $200,000 for 30 years with the following terms: Initial interest rate...

An ARM is made for $200,000 for 30 years with the following terms:

Initial interest rate = 3%

Index = 1-year Treasuries

Payments reset each year

Margin = 2 percent

Fully amortizing

Estimated forward rates:
BOY 2 4.50%
BOY 3 5.25%
BOY 4 6%
BOY 5 6.50%

Compute payments and balances for each of the years 1-5.

Solutions

Expert Solution

Given,

Initial rate= 3%

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

Interest cap is not specified.

Index for Year 2= 4.5%. Therefore, interest rate= 4.5%+2% = 6.5%

Index for Year 3= 5.25%. Therefore, interest rate= 5.25%+2% = 7.25%

Index for Year 4= 6%. Therefore, interest rate= 6%+2% = 8%

Index for Year 5= 6.5%. Therefore, interest rate= 6.5%+2% = 8.5%

Year 1: Monthly payments= $843.21   Balance at the end= $195,824.40

Year 2: Monthly payments= $1,251.73 Balance at the end= $193,462.64

Year 3: Monthly payments= $1,346.80 Balance at the end= $191,254.62

Year 4: Monthly payments= $1,442.60 Balance at the end= $189,168.46

Year 5: Monthly payments= $1,506.50 Balance at the end= $187,090.05

Calculations as below:

jeff jeffy answered 1 year ago
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