Question

Paul obtains a $300,000 mortgage loan a 5/1 interest-only ARM with a 10 year balloon at a 3% start rate, a 2% margin, and 2/6 caps. The initial monthly payment for the loan is $750. On the anniversary date of the loan, the index being used adjusts as follows: Year 1: 2.50% (initial year); Year 2: 2.75%; Year 3: 3.25%; Year 4: 3.50%; Year 5: 3.75%; Year 6: 3.00%; Year 7: 2.80%; and Year 8: 5.00%. What will be Paul's monthly payment in year 4

Answer 1

Paul's monthly payment in year 4 is $1,050.

Data and Calculations:

Mortgage loan = $300,000

Mortgage term = 10 years

5/1 interest-only ARM rate = 3%

Interest margin = 2%

Interest caps = 2/6

Initial monthly payment = $750

The index adjustment is as follows:

Year 1   2.50% (initial year)

Year 2  2.75%

Year 3  3.25%

Year 4  3.50%

Year 5  3.75%

Year 6  3.00%

Year 7  2.80%

Year 8  5.00%

Thus, Paul's monthly payment in year 4 is $1,050 ($750/2.50% x 3.50%).

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