Question
Hi I just need help figuring out how to solve this - I don't need the answers, just how to do it and to make
Hi I just need help figuring out how to solve this - I don't need the answers, just how to do it and to make sense of it.
1. You took an ARM five years ago and at that time, you were sure you would move in five years. The mortgage has following contract terms:
Loan amount: $560,000
Term (monthly payments)15 years
Adjustment period1 year
Index1-year T-bill
Margin2.00%
Teaser rate3.00%
Discount points1.30
Periodic (annual) cap1.50%
Lifetime cap3.20%
For 5 years, the 1-year T-bill rates moved as follows:
Year
rate
EOY0
2.40%
EOY1
2.90%
EOY2
3.50%
EOY3
4.20%
EOY4
3.80%
Create an ARM table (Year, N(term), loan amount, index, margin, etc). Show me a clear PMT, Contract rate, and loan balance up to 5 years.
a.What is your monthly payment in Year 3? What is your loan balance at the end of year 5?
b.What is the effective borrowing cost for this loan, through year 5? You repay the loan in month 60.
2. Your friend also took a $560,000 mortgage five years ago, but it was an FRM. The contract terms were:
Loan amount: $560,000
Term (monthly payments)15 years
Interest rate3.75%
Discount points1.50
a.What is the effective borrowing cost if he decides to repay the loan at the end of year 5?
3. Assume there was no prepayment penalty on either loan. Who was better off, you or your friend? Explain based on the effective borrowing costs.
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