Assignment:
Problem 1
Please use the following information to answer questions below.
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Adjusted Rate Mortgage
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Mortgage Amount
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$100,000
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Term
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6 years with annual payment
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Adjustment Period
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One Year Adjustable
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Discount Points
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0
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Costs with Loan Origination
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$8,000
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Initial Contract Interest Rate
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7.50%
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Margin
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2.25%
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Caps
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2.5% annual, 6% lifetime
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Market Index
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End of Year (EOY) 1: 8.6%; EOY 2: 9.5%; EOY 3: 10.5%; EOY 4: 7.25%
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Questions
1. What are the interest rates in year 2 to year 5?
2. What is the remaining balance by the end of the 1st year?
3. What is the annual payment in the 2nd year?
4. What is the effective cost of this loan if you hold the loan for only one year?
Problem 2
You have the following two mortgage choices:
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Fixed-Rate Mortgage
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2/1 Interest-only ARM
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Mortgage Amount
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$100,000
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$100,00
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Term
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3 years with annual PMT
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3 years with annual PMT
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The payments rises each year
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Discounts Points
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0
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0
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Costs with Loan Origination
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$1,000
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$1,000
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Initial Contract Interest Rate
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11.00%
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10.00%
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Margin
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2.00%
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Caps
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no annual cap; 3% lifetime cap
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Market Index
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End of Year (EOY) 1: 7.0%; EOY 2: 4.5%
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End of Year (EOY) 1: 7.0%; EOY 2: 4.5%
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Calculate APR for each mortgage choice?