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Karen has chosen to accept an Adjustable Rate Mortgage. She qualified at a fully indexed rate of 7.5%, but is offered 6.0% as a discounted
Karen has chosen to accept an Adjustable Rate Mortgage. She qualified at a fully indexed rate of 7.5%, but is offered 6.0% as a discounted interest rate for the first three years of her loan. Her 3/1 ARM will be based on the LIBOR index which stands at 4.5% today. The interest rate caps for her loan are 2/1/6. 1.) What percentage is the lender's margin for this loan? 2.) She has a 3/1 ARM. What does the "1" mean? 3.) What is the maximum interest rate Karen will ever have to pay on this loan? 4.) Unless Karen sells the house or refinances, how long will she be paying on this loan? 5.) When Karen's ARM interest rate adjusts, the rate she will pay is her current ARM rate plus the appropriate cap or the lender's margin plus the new index rate, whichever is __________. 6.) In year seven, Karen's ARM rate is about to adjust. Her current ARM rate has been 7.75%, but the index rate is now 5.25%. Taking into account the annual interest rate cap and the margin for her loan, what will Karen's new interest rate be
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