You are considering an ARM with the following characteristics:

Mortgage amount $=$ $$480,000\mathrm{.}00$

$2/6$ Interest rate caps

Margin $=2\mathrm{.}5$

Index $=1$ year TB yield

Term $=30$ years

One$-$year adjustable

Monthly Payments

Discount points $=5$

Initial Teaser Rate $=5\%$

Prepayment penalty $=5\%$ for the first three years

All subsequent adjustments are made from the Teaser Rate

Suppose the TB yield $4\mathrm{.}75\%$ at the outset of the loan, and the TB yield is $5\mathrm{.}25\%$ at the end of year one. Suppose that, at the end of year two, the index is $5\mathrm{.}5\%$ and stays constant for the remaining life of the loan.

If the loan is repaid at the end of year two, what is the effective cost?