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MakeNu Mortgage Company is offering a new mortgage instrument called the Stable Mortgage. This mortgage is...


MakeNu Mortgage Company is offering a new mortgage instrument called the Stable Mortgage. This mortgage is composed of both a fixed rate and an adjustable rate component. Mrs. Maria Perez is interested in financing a property, which costs $100,000, and is to be financed by Stable Home Mortgages (SHM) on the following terms:

The SHM requires a 5% down payment, costs the borrower 2 discount points, and allows 75% of the mortgage to be fixed and 25% to be adjustable. The fixed portion of the loan is for 30 years at an annual interest rate of 10.5%. With neither interest rate cap nor payment cap, the adjustable portion is also for 30 years with the following terms: Initial interest rate = 9% Index = one-year Treasuries Payments reset each year Margin = 2% Interest rate cap = None Payment cap = None

The projected one-year U.S. Treasury-bill index, to which the ARM is tied, is as follows: (BOY) 2 = 10% (BOY) 3 = 11% (BOY) 4 = 8% (BOY) 5 = 12%

(a) Calculate Mrs. Perez’s total monthly payment s and end of the year loan balances for the first five years.

(b) Calculate the lender’s yield, assuming Mrs. Perez repays the loan after five-years.

Solutions

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Answer:

a)

From the given data,

5% of loan is made as down payment hence the value of loan would be $95,000.

=> Loan Value: $95,000

Discount Points: 2%

Fixed Rate Portion: 75% of loan balance

10.5% Annual Interest Rate

30 year term

b)

Adjustable Rate Portion: 25.00% of the loan balance

9.00% Initial Interest Rate

2.00% Margin rate

Mortgage sumary is as follows:

Year

BOY Balance

Payments

EOY Balance

0

1

$95,000.00

$842.85

$94,481.13

2

$94,481.13

$895.26

$93,988.42

3

$93,988.42

$913.24

$93,459.69

4

$93,459.69

$860.99

$92,793.03

5

$82,793.03

$930.15

$92,155.73

Further, the yield can be calculated as,


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