Reference no: EM132890351

Question - You want to borrow $200,000 for 20 years for the purchase of your new home. You have been offered the following adjustable rate mortgage:

Initial contract rate = 4%,

Index = 1-year Treasuries,

Payments adjusted each year,

Margin = 2%,

Periodic interest rate cap = 2%,

Lifetime cap = 6%,

Payment cap = none,

Negative amortization not allowed.

Discount points  = 3.

The index to which the ARM is tied is forecast to be 6% at the end of year 1. You anticipate owning the house for two years.

Required -

a. Compute your monthly payments, interest and principal amortization payments, and end-of-year loan balances for the two-year period. Show your work and summarize your results by using a table that is similar to the following one.

b. If the ARM loan above is prepaid after 2 years, what would be the lender's yield (=borrower's cost of borrowing)? Show your work.