When calculating the APR on an ARM, the one assumption the lending institution makes
is that the INDEX does not move during the entire loan period. So if the index is at, say,
3% when a 30-year loan is granted, then the index is assumed to remain at 3% for the
next 30 years. This is not to be interpreted to mean the rate on the mortgage doesn't
move. There are 3 considerations to keep in mind:
•
is there a teaser?
•
what is the adjustment period of the loan?
•
what are the caps?
The bottom line is to do what you would normally do if the index really did not move
during this time period. You always try to be where you "should be" without violating
the caps, and only changing at the end of an adjustment period.
For the following problems, identify what your rate would be for each year of the loan:
Problem
Index
Margin
Initial Rate
Caps
Adjustment
Period
1
3%
2%
4%
2%
1 year
2
3%
2%
4%
1/2%
1 year
3
3%
2%
4%
1/4%
2 years
4
3%
2%
4 3/4%
1%
3 years
This
preview
has intentionally blurred sections.
Sign up to view the full version.
Problem 1:
Year
"is" rate
1
4
2
5
3
5
4
5
5
5
6
5
7
5
8
5
9
5
10
5
11
5
Problem 2:
Year
"is" rate
1
4
2
4 1/2
3
5
4
5
5
5
6
5
7
5
8
5
9
5
10
5
11
5
This is the end of the preview.
Sign up
to
access the rest of the document.
- Fall '11
- Marshall
- Debt, Interest, entire loan period
-
Click to edit the document details
