You are about to take out a new, $100,000, fully amortizing ARM mortgage. The loan is based on the 1?
Year Treasury bill rate, with margin of 2%. The rate and the payments are reset every year. The mortgage amortizes over a 15 year period. There is an annual interest rate change cap and floor of 2%, a life of loan interest rate change cap of 4% above the initial rate, and an annual payment change cap of 10%. The mortgage has no origination fees and no points.
Mortgage payments are made monthly.
You expect the following for the following 1-year Treasury bill rates.
1 Year T-Bill Rate
A.Using these rates, what monthly loan payment would you make during each of the loan’s first 3 years and what is the loan balance at the end of each of the 3 years? Also, indicate which, if any of the rate or payment caps or floors are binding.
B.Does this loan by year 3 reflect negative amortization? If so, compute the amount. If not, briefly explain why not.