QUESTION 7

Tim buys an apartment that costs $750,000 with an 85% LTV mortgage. Tim got a 30 year, 3/1 ARM with an initial teaser rate of 3.75% and monthly payments. The reset margin on the loan is 300 basis points above 1 year CMT. The index was 1% at the time of origination. Tim also had to pay 3 points for this loan. Suppose the index rate will remain 1% for the life of the loan and Tim prepays the mortgage in 5 years. Compute the true APR for this loan. (Write the answer as a percent so for example 2.5% should be written as 2.5, not as 0.025.)