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?

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