A 3/1 ARM is made for $150,000 at 7 percent with a 30-year maturity. a. Assuming that fixed payments are to be made monthly for

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A 3/1 ARM is made for $150,000 at 7 percent with a 30-year maturity. a. Assuming that fixed payments are to be made monthly for

three years and that the loan is fully amortizing, what will be the monthly payments? What will be the loan balance after three years? b. What would new payments be beginning in year 4 if the interest rate fell to 6 percent and the loan continued to be fully amortizing? c. In (a) what would monthly payments be during year 1 if they were interest only? What would payments be beginning in year 4 if interest rates fell to 6 percent and the loan became fully amortizing?

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1 answer:

Neko [114] · Answer 1 · 2022-03-14T15:35:27+03:00

Answer:

a. Assuming that fixed payments are to be made monthly for three years and that the loan is fully amortizing, what will be the monthly payments? What will be the loan balance after three years?

monthly payment = $997.95
principal balance after 36th payment = $145,090.59

b. What would new payments be beginning in year 4 if the interest rate fell to 6 percent and the loan continued to be fully amortizing?

monthly payment = $905.34

c. In (a) what would monthly payments be during year 1 if they were interest only? What would payments be beginning in year 4 if interest rates fell to 6 percent and the loan became fully amortizing?

a. $875

b. $935.98

Explanation:

A 3/1 adjustable rate mortgage is a 30 year mortgage where the interest rate is fixed for the first 3 years, and then it can vary.

I prepared an amortization schedule that shows the first 3 payments with a 7% interest rate and then the rest of the payments will carry a 6% interest rate.

The monthly payment for the first 36 months is $997.95 (principal balance after 36th payment $145,090.59), then it decreases to $905.34 per month.

See amortization schedule 1

if the monthly payments only covered interest expenses during the first 3 years, they would be $150,000 x 7%/12 = $875

then the monthly payments would be $935.98.

See amortization schedule 2

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