Question

A lender offers a 30-year, $600,000 1/1 ARM (adjustable rate

mortgage). The initial rate (teaser rate) is 4% and is only valid
for year 1, The margin is 200 bps (2%). The interest rate cap is 1%
annua

Answer 1

The question concerns a 30-year adjustable-rate mortgage (ARM) with an initial teaser rate, margin rate, and interest rate cap specified. It involves understanding how ARMs work, including initial rates, rate adjustments, and caps.

Step-by-step explanation:

The student is asking about a specific type of home loan referred to as an adjustable-rate mortgage (ARM), where the interest rate periodically adjusts based on market fluctuation. A 1/1 ARM means that the interest rate is fixed for the first year and then adjusts annually thereafter. The initial rate is known as the teaser rate, and in this case, it is 4%. The margin is added to the index rate to determine the new interest rate after the first year, and it's set at 200 basis points (bps) or 2% in this scenario. There's also an interest rate cap in place which limits the adjustment to no more than 1% per year.