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Suppose that you are considering taking out an adjustable-rate mortgage with the following terms:
Amount borrowed: $225,000
Index rate: Prime Rate (Current value is 3.5%)
Margin: 200 basis points.
Periodic cap: 1.5 percentage points
Lifetime cap: 5 percentage points
Amortization: 25 years
a. What will the initial monthly payment be for this loan?
b. If the loan’s interest rate adjusts every year and the prime rate falls to 2.75% by the end of the first year, what will your payment be in the second year of the loan?
c. What is the highest interest rate that the lender could charge over the life of the loan?
You have the option of deducting $2,000 as an “adjustment to income” on the front page of Form 1040, or you can take a $750 tax credit on the back page.
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