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practice problems

# practice problems - When calculating the APR on an ARM the...

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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

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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
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