A borrower received a 30-year ARM mortgage loan for $200,000. Rate caps are 3/2/6. The start rate is 3.50% and the loan adjusts every 12 months for the life of the mortgage. The index used for this mortgage is MTA (for this exercise, 3.00% at the start of the loan, 4.45% at the end of the first year, and 4.50% at the end of the second year). The margin on the loan is 3.00%, which remains the same for the duration of the loan. What is the initial rate (start rate) the borrower will pay during the first year? What is the interest rate the borrower will pay after the first rate adjustment? (Hint: Remember to use the “stair step method” for determining the new interest rate.) What is the fully indexed rate after the second year? What is the maximum interest rate the borrower will pay during the 30-year term for this loan? If the interest rate is at its maximum, what would the MTA index have to be to reach the maximum interest rate?
Mortgages
A mortgage is a formal agreement in which a bank or other financial institution lends cash at interest in return for assuming the title to the debtor's property, on the condition that the obligation is paid in full.
Mortgage
The term "mortgage" is a type of loan that a borrower takes to maintain his house or any form of assets and he agrees to return the amount in a particular period of time to the lender usually in a series of regular equally monthly, quarterly, or half-yearly payments.
A borrower received a 30-year ARM mortgage loan for $200,000. Rate caps are 3/2/6. The start rate is 3.50% and the loan adjusts every 12 months for the life of the mortgage. The index used for this mortgage is MTA (for this exercise, 3.00% at the start of the loan, 4.45% at the end of the first year, and 4.50% at the end of the second year). The margin on the loan is 3.00%, which remains the same for the duration of the loan.
- What is the initial rate (start rate) the borrower will pay during the first year?
- What is the interest rate the borrower will pay after the first rate adjustment? (Hint: Remember to use the “stair step method” for determining the new interest rate.)
- What is the fully indexed rate after the second year?
- What is the maximum interest rate the borrower will pay during the 30-year term for this loan?
- If the interest rate is at its maximum, what would the MTA index have to be to reach the maximum interest rate?
An adjustable-rate mortgage is a house loan with a variable interest rate (ARM). An ARM's initial interest rate is fixed for a specific period of time. Following then, the interest rate applied to the outstanding debt is reset on a regular basis, at yearly or even monthly intervals. Variable-rate mortgages (ARMs) are sometimes known as floating mortgages. The interest rate on an ARM is adjusted depending on a benchmark or index, plus a spread known as an ARM margin. The London Interbank Offered Rate is the most common index used in ARMs (LIBOR).
Early in the loan period, payments are lower and rates are lower. People can purchase more costly homes than they otherwise might since lenders can take the reduced payment into account when determining the eligibility of borrowers. Borrowers can benefit from declining rates without refinancing thanks to it.
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
I can't see the answers to questions there block off
by Bartleby Expert
