An ARM is made for $200,000 for 30 years. The start interest rate is 5% and the

Question

An ARM is made for $200,000 for 30 years. The start interest rate is 5% and the borrower will make monthly interest-only payments for the first three years. Payments thereafter must be sufficient to fully amortize the loan at maturity. At the beginning of year 4, if the interest rate increases to 6%, what will the monthly payments be in year 4 then? (Choose the nearest value)

$1,247.97

$1,073.64

$1,126.08

$1,199.10

Which of the following is TRUE?

A reverse mortgage is structured as a rising equity, rising debt loan.

Tighter interest rate adjustment caps on an ARM mean greater interest rate risk to lenders

The longer the time between rate adjustments on an adjustable rate mortgage the more risk assumed by borrowers.

A Price Level Adjusted Mortgage does not involve negative amortization.

$1,247.97

$1,073.64

$1,126.08

$1,199.10

Explanation / Answer

1.
Option A
Using financial calcualtor:
I/Y=6%/12
N=27*12
PV=200000
FV=0
CPT PMT=1247.97

Using excel:
=PMT(6%/12,27*12,200000)
2.
Option B
Tighter interest rate adjustment caps on an ARM mean greater interest rate risk to lenders

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