You have applied for a $200,000, 30-year ARM mortgage that charges 3 discount points and has the features noted here. Payments and interest rates are adjusted each year by adding a margin of 2.25% to the index. Initial Interest rate is 3.75% and is in effect for one year. The Index (One year Treasuries) for Year 2 is 5.00% and the Index for Year 3 is 6.25%. There are no limits on interest rate changes, but there is a 10% up or down annual limit in payment changes (negative amortization is allowed). You will stay in the house for three years.

On separate paper, write out your computations that document work . For each year note the interest rate charged, the monthly payment, the amount paid to interest, and the End of Year Balance. Write out a cash flow table and use it to compute the Yield to Lender as an APR.