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FIN 3334- Lender risk mitigation notes (lesson 4)


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Unformatted text preview: Index Rate and Contract Rate Charged to Borrowers (i) Usually Expressed in Basis Points: 1 Basis Point = 0.01% (ii) Represents: Lender’s Compensation for Untransferred Risks (iii) Composite Rate: Index Rate + Margin d) Hybrid Adjustable‐Rate Mortgage Loans (i) 3/1: Initial Payment Fixed for 36 Months, then Annual Adjustments (every 12 months) (ii) 5/1: Initial Payment Fixed for 60 Months, then Annual Adjustments (every 12 months) e) Teaser‐Rate: (i) Initial Rate or Payment Less than Fully Indexed Composite Rate (ii) Common with Subprime Loans, Used to Determined Income Eligibility (iii) Borrowers Thought Could Always Refinance Example 3. You have been offered a $125,000 30‐year 1/1 ARM loan with an initial rate of 5%, indexed to the 1year Libor (which you assume doesn’t change) and margin of 275 basis points. What are the scheduled monthly payments if LIBOR is 4%? Payments 1‐12: Payments 13‐360: ARM PracticeProblem: What is the size of the scheduled 1st, 56th, and 61st payments of a 30‐year $400,00...
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