question archive Contract Rate is index plus Margin to get what the interest rate should be if it is a similar FRM instead of an ARM
Contract Rate is index plus Margin to get what the interest rate should be if it is a similar FRM instead of an ARM
Subject:FinancePrice: Bought3
Contract Rate is index plus Margin to get what the interest rate should
be if it is a similar FRM instead of an ARM. PR = Pay rate and what you will pay for the ARM each year.
So let's say we have a 30 year ARM at 4% for $150,000. To get the payment you calculate it like normal. Then to get the balance, you say new n = 12, cpt FV. That answer is your balance year 1 and your PV for year 2. The key is getting the right interest rate (PR or pay rate) each year.
1)a)Douglas is considering an ARM with the following characteristics: Mortgage Amount = $100,000, Index Yield for Year 1 = 6%, Margin = 2.5%, Annual Cap = 2%, Lifetime Cap = 6%, Loan Maturity = 30 years, Inflation for the next year is 1.5% and the Teaser Rate is 6%. What is the balance at the end of year two?
b)Boone is considering an ARM with the following characteristics: Mortgage Amount = $250,000, Teaser Rate = 7.75%, Index Value = 8.75%, Inflation Rate for the Index = 1.5% per Year, Margin = 2.0%, Annual Cap = 1%, Lifetime Cap = 5%, Loan Maturity = 15 Years. What is the balance at the end of year three?
