In: Finance
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.
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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,