Please explian how to figure out the the initial interest rate of the ARM ?
Given th these facts thanks :)
Ben bought a home with an adjustable-rate mortgage. The margin on the loan is 2.7% and the rate cap is 7.2% The current index rate is 4.3%
beck put $3000 in a saving account. At the end of 5 years, the account had earned $900 in interest . At what annual simple interest rate did the account grow.
Calculate i,interest rate
To figure out the initial interest rate of an adjustable-rate mortgage (ARM), you need to consider three factors: the margin, the index rate, and any rate caps applied to the loan. Here's how you can calculate it using the given information:
1. Start with the index rate: The index rate is a variable interest rate that is used as the basis for calculating the ARM's interest rate. In this case, the current index rate is 4.3%.
2. Add the margin to the index rate: The margin is a fixed percentage added to the index rate to determine the initial interest rate of the ARM. In this case, the margin is 2.7%. So, you would add 2.7% to the current index rate of 4.3%.
Calculation: 4.3% + 2.7% = 7%
3. Check for rate caps: Rate caps put a limit on how much the interest rate can increase or decrease during specific periods, usually annually or over the life of the loan. In this case, the rate cap is 7.2%.
4. Compare the calculated interest rate with the rate cap: Since the calculated initial interest rate after adding the margin is 7%, you need to check if this rate exceeds the rate cap of 7.2%. If it does, then the initial interest rate would be capped at 7.2%. Otherwise, it would remain at the calculated rate.
In this case, the calculated interest rate of 7% is lower than the rate cap of 7.2%, so the initial interest rate of the ARM would be 7%.
Therefore, based on the given information, the initial interest rate of Ben's ARM would be 7%.