posted by Pauline Holcomb .
A borrower received a 30-year ARM mortgage loan for $120,000. The start rate was 3.50% and the loan adjusts every 12 months for the life of the mortgage. Rate caps are 3/2/6. The index used for this mortgage is the LIBOR. For this exercise, let’s say it was 3.00% at the start of the loan, 5.00% at the end of the first year, and 4.50% at the end of the second year. The margin on the loan is 3.00%.
1. What’s the initial rate and what’s the interest rate after the first year?
2. What is the fully indexed rate after the second year?
3. What is the borrower’s interest rate after the second year?
4. What is the maximum interest rate this loan could have?
5. What would the LIBOR have to be to obtain that interest rate?