Question

a mortgage company offers borrowers a 4% annual interest rate on the one-year arm that is amortized for 30 years. the index rate is forecast to be 5% for next year and the margin on this loan is 2%. the annual interest rate adjustment cap is 2%. what is the adjusted interest rate for the second year? what are the monthly payments for year 1 and 2 if $200,000 is borrowed? (remember to use the balance as the new pv for 2nd year.)

Answer 1

The adjusted interest rate for the second year will be capped at 6% due to the annual interest rate adjustment cap of 2%. The monthly payment for year 1 will be approximately $955. For year 2, the monthly payment will be calculated using the remaining balance from year 1 as the new present value and the adjusted interest rate of 6%.

Step-by-step explanation:

To calculate the adjusted interest rate for the second year, we first need to determine the new index rate, which is forecasted to be 5%. Then, we add the margin of 2% to get a total of 7%. Next, we check if the adjusted interest rate exceeds the annual interest rate adjustment cap of 2%. Since 7% exceeds the cap, the adjusted interest rate will be capped at 6%.

To calculate the monthly payments for year 1, we use the loan amount of $200,000 and the annual interest rate of 4%. Using an amortization formula, we can determine that the monthly payment for year 1 is approximately $955.

For year 2, we use the remaining balance from year 1 as the new present value (PV). We also use the adjusted interest rate of 6% to calculate the monthly payments. Using the same amortization formula, we can determine the monthly payment for year 2.