You are considering an adjustable rate mortgage loan with the following characteristics: Loan amount: $300,000 Term: 20 years Index: one year T-Bill Margin: 2.5% Periodic
You are considering an adjustable rate mortgage loan with the following characteristics:
Loan amount: $300,000
Term: 20 years
Index: one year T-Bill
Margin: 2.5%
Periodic cap: 2%
Lifetime cap: 5%
Negative amortization: not allowed Financing costs: $3,500 in origination fees and 1 discount point
Suppose the Treasury bill yield is 3.5% at the outset and is then moves to 4.5% at the beginning of the second year and to 8.5% at the beginning of the third year.
a) Build a table that shows the contract rate, monthly payment, and the end-of-year balance for years 1-3.
b) If you pay off the loan at the end of the third year, what is your effective borrowing cost? (Dont forget about the financing costs).
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