Fiona is purchasing a condominium and is financing $305,000 with a 30-year 5/1 ARM at 4.65% with a 1/12 cap structure. What will her payments be at the beginning of year 6?
To calculate Fiona's payments at the beginning of year 6, we need to understand the terms of her loan and the amortization schedule.
1. Loan Amount: $305,000
2. Loan Term: 30 years
3. Adjustable Rate Mortgage (ARM): A type of mortgage loan with an initial fixed interest rate (5/1 ARM means the rate is fixed for the first 5 years) and after that, it becomes adjustable according to the prevailing interest rates.
4. Initial Fixed Rate: 4.65%
5. Cap Structure: A cap structure sets limits on how much the interest rate can change after the initial fixed-rate period. In this case, it's a 1/12 cap structure, meaning the interest rate can increase or decrease by a maximum of 1% each year.
To calculate Fiona's payments at the beginning of year 6, we need to find out the new interest rate for the 6th year and then calculate the new monthly payment.
Step 1: Calculate the new interest rate for year 6:
Since Fiona has a 5/1 ARM, the interest rate is fixed for the first 5 years. So, we need to determine the new rate for year 6.
The interest rate can increase or decrease by a maximum of 1% annually due to the 1/12 cap structure.
Let's say the initial fixed rate is R, and the new rate for year 6 is X.
Given:
Initial rate (R) = 4.65%
Cap Structure = 1/12
To find X, we need to subtract the cap structure (1/12) from the initial rate (R):
X = R - Cap Structure
X = 4.65% - (1/12)
X = 4.65% - 0.0833
X ≈ 4.5667%
So, the new interest rate for year 6 is approximately 4.5667%.
Step 2: Calculate the new monthly payment for year 6:
To calculate the new monthly payment, we need to consider the loan amount, the loan term, and the new interest rate for year 6.
We can use an online mortgage calculator or an Excel spreadsheet to calculate the monthly payment based on these values.
Using the loan amount ($305,000), the loan term (30 years), and the new interest rate (4.5667%), we can determine Fiona's new monthly payment at the beginning of year 6.
The monthly payment will be slightly different from the initial payment because the loan balance will be slightly lower after 5 years of payments.
Please note that there might be additional factors to consider in the actual calculation, such as property taxes, insurance, and any other fees or escrow accounts. Consult a mortgage professional or use a dedicated mortgage calculator for a more accurate calculation.