Part 4: Fully amortized Variable rate mortgage

1. Assume that you know in advance (at the time of the mortgage initiation) the future prime rate at any point in time. According to you, the prime rate will be the following:

At mortgage initiation: 3.50%

6 months after mortgage initiation: 3.75%

10 months after mortgage initiation: 4.00%

21 months after mortgage initiation: 4.25%

32 months after mortgage initiation: 4.50%

52 months after mortgage initiation: 5.00%

56 months after mortgage initiation: 5.50%

From here on, the prime rate remains the same for the reminder time of the loan.

1. Create a monthly amortization schedule for a fully amortized $320K, 15yr, 2/1 hybrid ARM mortgage that charges a rate of prime minus 1.0%. The original loan balance is 70% of the value of the house when initiated and the house is expected to appreciate at a rate of 2.5% annually.
2. What is the remaining loan balance at the end of the holding period if the homeowner sells the home after 59 months?
3. Illustrate with a well-labeled graph the amount of equity the homeowner builds throughout the holding period of the loan.
4. What is the owner equity in the house at the time the house is sold?