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Variable Rate Mortgage Quiz

Jeff's Mortgage Company is offering you a 30 year, $200,000 variable rate mortgage with an introductory rate of 5% for the first year (12 months). Interest rates for the following years pegged at 2 over the 1-year LIBOR rate prior to the new year. Jeff is using the following LIBOR rates to calculate your interest.

1 yr. LIBOR rate year

7% 2

5% 3

#1. What is the monthly payment for year 1?

#2. What is the monthly payment for year 2?

#3. What is the monthly payment for year 3?

#4. What is the balance on this loan at the end of 3 years (36 payments)?

#5. How much interest was paid to Vulcan during the first 3 years (36 payments) at this loan?

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Hubert Koch
Hubert KochLv2
28 Sep 2019

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ADJUSTABLE RATE MORTGAGES

Ann found an apartment that costs $500,000. She has saved $100,000 for a down payment and will get a mortgage for $400,000. It will be a fully amortizing, 30 year, 1/1 adjustable rate mortgage with monthly payments. The initial rate is 2%. The rate will reset to 175 basis points above the LIBOR. There are no rate caps. The initial LIBOR is 1%. The following 4 questions will use this information.

a) What is Ann’s payment for the first 12 months?

b) Suppose the LIBOR remains the same in the second year as it was in the first. What is Ann’s payment in the 2nd year? (Hint: you will first need to compute Ann’s balance after the first year.)

c) What is Ann’s APR? (i.e. What is Ann’s IRR on this loan assuming the index remains the same for the life of the loan? Please give the annual IRR, so multiply the monthly IRR by 12.)

d) Suppose the LIBOR at the first reset is 7%. What is Ann’s monthly mortgage payment in the 2nd year?

Jane plans to borrow from a bank to finance her investment in a real estate project. She considers an ARM loan with three-year loan term, $100,000 loan amount. The loan has the following terms: 1) initial interest rate = 8.5%; 2) margin = 3%; 3) loan amortization period = 15 years; 4) frequency of adjustment = 1 year (monthly compounding); 5) interest rate cap = none; 6) payment cap = none; and 7) discount points = 3%; 8) no negative amortization is allowed. The index rates (i.e., based on 3 year treasure rate) for next two years (i.e., the 2nd and 3rd year) are expected to be 11% and 8%, respectively.

(a) If the loan will be repaid after 3 years, what would be the monthly payment and the ending loan balance for each of the three years?

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mortgage broker is offering a $284,000 20-year mortgage with a teaser rate. In the first two years of the mortgage, the borrower makes monthly payments on only a 5.0 percent APR interest rate. After the second year, the mortgage interest rate charged increases to 8.0 percent APR

What are the monthly payments in the first two years?

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