You want to borrow $200,000 for 20 years for the purchase of your new home....
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You want to borrow $200,000 for 20 years for the purchase of your new home. You have been offered the following adjustable rate mortgage: Initial contract rate=4%, Index=1-year Treasuries, Payments adjusted each year, Margin=2%, Periodic interest rate cap=2%, Lifetime cap=6%, Payment cap=none, Negative amortization not allowed. Discount points =3.
The index to which the ARM is tied is forecast to be 6% at the end of year 1. You anticipate owning the house for two years.
a. Compute your monthly payments, interest and principal amortization payments, and end-of-year loan balances for the two-year period. Show your work and summarize your results by using a table that is similar to the following one.
b. If the ARM loan above is prepaid after 2 years, what would be the lenders yield (=borrowers cost of borrowing)? Show your work.
