Question
1-Take the last three digits of Social Security Number ________X 1000 = Price of house. (If first digit is zero, replace it with a 5,
1-Take the last three digits of Social Security Number ________X 1000 = Price of house. (If first digit is zero, replace it with a 5, for example: 089 would become 589x1000=589,000= price of house.)
2- A borrower wants to evaluate the loans listed below and anticipates owning the new home for 8 years. Calculate the payments, loan balance at the end of year 8 and yield for each mortgage for the 8 year period using spread sheets.
3- Based on estimated forward rates, the index to which the ARM is tied is forecast as follows:
EOY six months: 5.5% EOY 1: 4.10%
EOY 18months: 5.75% EOY 2: 6.15%
EOY 30months: 8.5% EOY 3: 9.25%
EOY 42months: 9.5% EOY 4: 10.2%
EOY 54months: 11% EOY 5: 13.0%
EOY 66months: 10.0% EOY 6: 8.0%
EOY 78months: 7.5% EOY7: 6.0%
4- The five different mortgages are listed below:
Mortgage A: FRM @6.30 % for 30 years with 20% down payment, 1.25 point.
Mortgage B: ARM @ 5.5% for 30 years with 20% down payment, 1.5 point, adjustable annually based on the index of one-year Treasuries given plus a margin of 1.50%. This loan has an annual interest rate cap of 1% and 4% interest cap over the life of the loan and no negative amortization.
Mortgage C: ARM @ 4.0% for 30 year with 20% down payment, .75 point, adjustable annually based on the index of one-year Treasuries given plus a margin of 1.25%. This loan has a payment cap of 8% and allows negative amortization.
Mortgage D: ARM @ 3.25% for 30 years with 20% down payment, 0.5 points, adjustable annually based on the index of one-year Treasuries plus a margin of 1.0%. This loan has no caps.
5- From your answers above which loan would you choose and WHY?
Explain why the initial rate for each of the mortgages is different. Make sure to discuss the risk.
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