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

Solutions

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 1 year ago

Next > < Previous

Related Solutions

George would like to borrow $114,000 using an adjustable-rate mortgage instrument. He has the following two...

George would like to borrow $114,000 using an adjustable-rate mortgage instrument. He has the following two options available: a. 1-year ARM, 15-year amortization schedule, 4.50% initial interest rate, 2% margin, 2% annual interest rate cap, 4% lifetime cap. b. 1-year ARM, 20-year amortization schedule, 4.25% initial interest rate, 1.75% margin, no cap. Assume that each of these loans is indexed to the 1-year Treasury rate, and that this index is expected to have a value of 5% at the end...

You borrow $396,000 to buy a home using a 15-year mortgage with an interest rate of...

You borrow $396,000 to buy a home using a 15-year mortgage with an interest rate of 3.00 percent and monthly payment. What percentage of the total amount paid in the first 5 years will go toward principal repayment? Group of answer choices 58.2 percent 68.7 percent 31.3 percent 41.8 percent

You borrow $395,000 to buy a home using a 15-year mortgage with an interest rate of...

You borrow $395,000 to buy a home using a 15-year mortgage with an interest rate of 3.75 percent and monthly payment. What percentage of the total amount paid in the first 3 years will go toward interest? Group of answer choices 60.3 percent 39.7 percent 68.4 percent 31.6 percent

Your 30 year mortgage is $350,000 with an interest rate of 4%. Prepare the amortization schedule...

Your 30 year mortgage is $350,000 with an interest rate of 4%. Prepare the amortization schedule for repayment of the mortgage

A borrower takes out a 15-year adjustable rate mortgage loan for $560,000 with monthly payments. The...

A borrower takes out a 15-year adjustable rate mortgage loan for $560,000 with monthly payments. The first 4 years of the loan have a “teaser” rate of 5%, after that, the rate can reset with a 5% annual payment cap. On the reset date, the composite rate is 9%. What would the Year 5 (after 4 years; 11 years left) monthly payment be?

A borrower takes out a 15-year adjustable rate mortgage loan for $550,000 with monthly payments. The...

A borrower takes out a 15-year adjustable rate mortgage loan for $550,000 with monthly payments. The first 5 years of the loan have a “teaser” rate of 4%, after that, the rate can reset with a 5% annual payment cap. On the reset date, the composite rate is 7%. What would the Year 6 (after 5 years; 10 years left) monthly payment be?

5. Construct an amortization schedule for the mortgage. If the Halls would pay extra payment of...

5. Construct an amortization schedule for the mortgage. If the Halls would pay extra payment of $150 a month starting 49th month, how quickly will they able to payoff the mortgage? Be sure to have a zero balance at the end of amortization. Loan Amount 180,576 Loan Length in months 240 Interest (APR) 4.250% Total interest payment Hint: Be sure to compute the total interest payments using "Sum()" function. Prepayment $150 Total # of pmts with prepay With the prepayments,...

You borrow $675,000 to buy a home using a 30-year mortgage with an interest rate of...

You borrow $675,000 to buy a home using a 30-year mortgage with an interest rate of 3.675 percent and monthly payment. Calculate the interest portion of the 20th payment. Disregard property taxes and mortgage insurance. Group of answer choices $2,006 $1,999 $2,002 $1,818 $1,821

You borrow $325,000 to buy a home using a 30-year mortgage with an interest rate of...

You borrow $325,000 to buy a home using a 30-year mortgage with an interest rate of 3.75 percent and monthly payment. Calculate the monthly payment amount. Disregard property taxes and mortgage insurance. Group of answer choices $1,505.13 $1,489.25 $1,417.08 $1,572.46 This morning, you took out a loan of $386,000 to purchase a home. The interest rate on the 30-year mortgage is 3.75 percent and you will make monthly payment. You have decided to make additional monthly payment of $360 beginning...

Compute the payment for year 2 for the following adjustable rate mortgage. The loan has an...

Compute the payment for year 2 for the following adjustable rate mortgage. The loan has an annual adjustment period, is indexed to the one-year Treasury Bill, and carries a margin of 2%. The original composite rate was not a teaser and was equal to 4%. The one-year T-bill rate decreased 0.5% at the start of year 2. The loan was 80% loan-to-value on a property worth $220,000, and it was fully amortizing over a term of 30 years.

Subjects