Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Adjustable rate mortgages are are a common type of mortgage used by home buyers in the United States. The loan has an initial interest rate
Adjustable rate mortgages are are a common type of mortgage used by home buyers in the United States. The loan has an initial interest rate and then the rates go either up or down each year depending on the prime interest rate banks must pay. The monthly payments on the loan also change each year. New Consumer Protection laws only requires that a lender disclose the total payments on a loan for the initial APR, even though the actual total payments may turn out to be substantially more if rates go up. Many adjustable rate loans have an interest rate cap of 5% over the lifetime of the loan. That means, that if the initial rate was 3.76% the buyer could eventually end up with a loan with an APR of 8.76%. Imagine that you agree to a $350,000 loan for 30 years with an initial rate of 3.76%. Payments on the loan would be $1,622.89 per month, and the total payments over 30 years would be $584,240.85. Suppose you make the monthly payments for 5 years and during that time the interest rate rises to its cap of 8.76%. The balance of the loan at the end of 5 years will be about $322,000. Compute the payments for a $322,000 loan for 25 years under the worst case scenario where the interest rate raises to its cap of 8.76% and stays there for the duration of the loan. Compute the total of the monthly payments for the last 25 years by multiplying the monthly payments by 300 months. Compute the total of the monthly payments for the first 5 years of the loan by multiplying $1,622.89 per month by 60 months. Compute the total payments in the worst case scenario made over 30 years of the loan by adding the total payments for the first 5 years and the last 25 years. Compute the possible amount of the undisclosed interest by subtracting $584,240.85, which is the amount that must be disclosed by law, from the total payments in the worst case scenario
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started