Question $3$: Impact of interest rate caps

In this question you will consider the same adjustable$-$rate mortgage from Question $2$ with the addition of interest rate caps.

$1.$ What is the interest rate of the loan in year $2,$ assuming it has an annual rate cap at $1\%$ and a lifetime cap at $7\%?$

a$.$ Year $1$

b$.$ Year $2$

c$.$ Year $3$

$2.$ What is the outstanding loan balance at the end of year $2$ of the adjustable$-$rate mortgage with an annual rate cap at $1\%$ and a lifetime cap at $7\%?$

Beginning of Year $1$ Beginning of Year $2$ Beginning of Year $3$

Loan Balance

Monthly Payment

Finally, to reflect on the calculations, compare and contrast the monthly payments and outstanding loan balances in year $2$ for each mortgage. Understand the importance of rate caps and reflect on scenarios when rate caps could save you a lot of money!