Richard would like to borrow Sh. 114,000 using an adjustable-rate mortgage instrument with 15-year amortization schedule,...

Richard would like to borrow Sh. 114,000 using an adjustable-rate mortgage instrument with 15-year amortization schedule, payable monthly, 4.50% initial interest rate, 2%margin and 2 annual interest rate cap: Assume that the loan is indexed to the 1-year Treasury rate, and that this index is expected to have a value of 5% at the end of the first year and 7.5% at the end of the second year. Joseph's expected holding period is 3 years. Required: calculate the effective rate of borrowing cost

Expert Solution

Given,

Initial rate= 4.5%, margin over index rate= 2% and annual cap= 2%

Reset in year 1: Index rate is given at 5%. APR for year 2= 5%+2% =7% subject to annual cap.

Therefore APR for year 2= 4.5%+2% = 6.5%

Reset in year21: Index rate is given at 7.5%. APR for year 2= 7.5%+2% =9% subject to annual cap.

Therefore APR for year 2= 6.5%+2% = 8.5%

Monthly payments each of the three years and the principal at the beginning and end of each year are as follows:

Effective rate of borrowing cost (annual)= 6.541772% as follows:

jeff jeffy answered 2 years ago

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