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).