Adjustable Rate Mortgage with Caps Calculation Complete the chart below using th
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Question
Adjustable Rate Mortgage with Caps Calculation
Complete the chart below using the loan assumptions below.
Loan Assumptions
Loan Amount: $350,000
Term: 30 years (360 months)
Margin: 2.75%
Periodic Cap: 1.00%
Life-of-Loan Cap: 5.00%
Life-of-Loan Max. Interest Rate: 8.50%
Rate changes once a year at the beginning of the year.
Year 1
Year 2
Year 3
Index – WSJ Prime Rate
Teaser Rate
Annual Interest Rate
Beginning Mortgage Balance
Remaining Term (at beginning of year)
360 months
Monthly Payment
Year 1
Year 2
Year 3
Index – WSJ Prime Rate
3.25% 3.75% 4.5%Teaser Rate
3.5% n/a n/aAnnual Interest Rate
Beginning Mortgage Balance
350,000Remaining Term (at beginning of year)
360 months
Monthly Payment
Explanation / Answer
year 1: Annual interet rate = teaser rate=3.5%
Monthly payment use PMT function in excel.
pmt(rate,nper,pv,fv type)
=PMT(3.5%,30,350000,,0)
=$19,030
Year 2:
Annual interest rate=index+margin=3.75+2.75=6.5%. Here the loan value is =350,000-6780=$343,220
use ppmt formulae to find principal portion of first payment =ppmt(3.5%,1,30,350000,,0)=6780
PMT(6.5%,29,343220,,0)=$26,590.77
Year 3:
Annual interest rate=index+margin=4.5+2.75=7.25%. Here the loan value is =343,220-4281.76=$338,938.57
use ppmt formulae to find principal portion of first payment =ppmt(6.5%,1,29,343220,,0)=$4281.46
PMT(7.25%,28,338938.57,,0)=$28,620.86
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