Question
David is considering an adjustable rate mortgage loan with the following characteristics: Loan amount: $250,000 Term: 30 years Index: one year T-Bill Margin: 2% Periodic
David is considering an adjustable rate mortgage loan with the following characteristics: Loan amount: $250,000 Term: 30 years Index: one year T-Bill Margin: 2% Periodic cap: 2% Lifetime cap: none Negative amortization: not allowed Financing costs: 1 discount point and $5,500 in origination fees.
The Treasury bill yield is 6% at the outset and is expected to increase to 8% at the beginning of the second year and to 13% at the beginning of the third year. If David prepays the loan at the end of the third year, what is the ARMs effective borrowing cost?
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