As a lender for First Forearm Bank, you agreed to provide a $270,000 5/1 hybrid mortgage, at a 2.875% rate to a customer. After five years, the loan is indexed to one-year U.S. Treasury securities with a spread of 2.75% and a two percent annual interest rate movement cap after year five. The loan is expected to prepay at the end of year seven and has a 2-point loan origination fee and $1,200 in external appraisal/attorney/inspection costs. Expected one-year U.S. Treasury rates are as follows (i.e. the one-year U.S. Treasury Rate at the end of five years from today and six years from today)
Year Rate
5 2.57%
6 3.08%
What is the borrower’s cost of funds?