Consider an adjustable rate mortagage of $90,000 with a maturity of 30 years and monthly payments. At the end of each year, the interest rate is adjusted to become two percentage points above the index. There is an annual cap of 300 basis points (3%) and a life time cap of 500 basis points (5%). In the first year the contract rate is 7%, with no teaser. In year two, the index rate is 9%.

What is the contract rate in year two? 8%, 10%, 9%, 11%?

What monthly payment is called for in year two? $786, $795, $599, $648?