Question

What is the yield on a $100,000 adjustable-rate mortgage loan? The starting interest rate is 7%; it is a 30-year loan; the adjustment interval is 1 year. The margin over the index is 2% and there is a $2,000 loan origination fee. Index rate for year 2 is 8%, year 3 10%, year 4 12%, year 5 13%.

Answer 1

Explanation:

Loan Details:

Initial interest rate (Year 1): 7%

Margin over the index: 2%

Index rate for Year 2: 8%

Index rate for Year 3: 10%

Index rate for Year 4: 12%

Index rate for Year 5: 13%

Loan amount: $100,000

Loan origination fee: $2,000

Calculations:

For Year 1 (7% interest):

M1 = $6,656.08

For Year 2 (10% interest):

M2 = $9,644.86

For Year 3 (12% interest):

M3 = $11,712.87

For Year 4 (14% interest):

M4 = $14,073.71

For Year 5 (15% interest):

M5 = $15,501.60

Total Payments Made Over the First 5 Years:

Total payments ≈ $6,656.08 + $9,644.86 + $11,712.87 + $14,073.71 + $15,501.60 ≈ $57,589.12

Yield Calculation:

Yield ≈ ($100,000 - $57,589.12) + $2,000 ≈ $44,410.88 + $2,000 ≈ $46,410.88

So, the yield on the $100,000 adjustable-rate mortgage loan is approximately $46,410.88.