BUSI 422 Homework 2 Adjustable Mortgage Calculations Assignment solutions complete answers

BUSI 422 Homework 2 Adjustable Mortgage Calculations Assignment solutions complete answers 

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A price level adjusted mortgage (PLAM) is made with the following terms:

Payments to be reset at the beginning of each year.

Assuming inflation is expected to increase at the rate of 6 percent per year for the next five years:

a. Compute the payments at the beginning of each year (BOY).

b. What is the loan balance at the end of the fifth year?

c. What is the yield to the lender on such a mortgage?

 

A basic ARM is made for $220,000 at an initial interest rate of 6 percent for 30 years with an annual reset date. The borrower believes that the interest rate at the beginning of year (BOY ) 2 will increase to 7 percent.

a. Assuming that a fully amortizing loan is made, what will the monthly payments be during year 1?

b. Based on (a) what will the loan balance be at the end of year (EOY ) 1?

c. Given that the interest rate is expected to be 7 percent at the beginning of year 2, what will the monthly payments be during year 2?

d. What will be the loan balance at the EOY 2?

e. What would be the monthly payments in year 1 if they are to be interest only?

 

A 3/1 ARM is made for $159,000 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?

 

An ARM for $101,000 is made at a time when the expected start rate is 5 percent. The loan will be made with a teaser rate of 2 percent for the first year, after which the rate will be reset. The loan is fully amortizing, has a maturity of 25 years, and payments will be made monthly.

a. What will be the payments during the first year?

b. Assuming that the reset rate is 6 percent at the beginning of year (BOY) 2, what will the payments be?

c. By what percentage will the monthly payments increase?

d. If the reset date is three years after loan origination and the reset rate is 6 percent, what will the loan payments be beginning in year 4 through year 25?

 

An interest-only ARM is made for $205,000 for 30 years. The start rate is 5 percent and the borrower will make monthly interest-only payments for three years. Payments thereafter must be sufficient to fully amortize the loan at maturity.

a. If the borrower makes interest-only payments for three years, what will the payments be?

b. Assume that at the end of year 3, the reset rate is 6 percent. The borrower must now make payments so as to fully amortize the loan. What will the payments be?

 

Assume that a lender offers a 30-year, $147,000 adjustable rate mortgage (ARM) with the following terms:

Fully amortizing; however, negative amortization allowed if interest rate caps reached

Based on estimated forward rates, the index to which the ARM is tied is forecasted as follows: Beginning of year (BOY) 2 = 7 percent; (BOY) 3 = 8.5 percent; (BOY) 4 = 9.5 percent; (BOY) 5 = 11 percent.

a. Compute the payments and loan balances for the ARM for the five-year period.

b. Compute the yield for the ARM for the five-year period.

 

A floating rate mortgage loan is made for $200,000 for a 30-year period at an initial rate of 12 percent interest. However, the borrower and lender have negotiated a monthly payment of $1,600.

a. What will be the loan balance at the end of year 1?

b. If the interest rate increases to 13 percent at the end of year 2, how much interest will be accrued as negative amortization in year 2 and year 5 if the payment remains at $1,600?

 

A builder is offering $135,534 loans for his properties at 9 percent for 25 years. Monthly payments are based on current market rates of 9.5 percent and are to be fully amortized over 25 years. The property would normally sell for $150,000 without any special financing.

a. At what price should the builder sell the properties to earn, in effect, the market rate of interest on the loan? Assume that the buyer would have the loan for the entire term of 25 years.

b. At what price should the builder sell the properties to earn, in effect, the market rate of interest on the loan if the property is resold after 10 years and the loan repaid?

 

A property is available for sale that could normally be financed with a fully amortizing $82,000 loan at a 10 percent rate with monthly payments over a 25-year term. Payments would be $745.13 per month. The builder is offering buyers a mortgage that reduces the payments by 50 percent for the first year and 25 percent for the second year. After the second year, regular monthly payments of $745.13 would be made for the remainder of the loan term.

a. How much would you expect the builder to have to give the bank to buy down the payments as indicated?

b. Would you recommend the property be purchased if it was selling for $5,000 more than similar properties that do not have the buydown available?

 

An appraiser is looking for comparable sales and finds a property that recently sold for $225,500. She finds that the buyer was able to assume the seller’s fully amortizing mortgage, which had monthly payments based on a 7 percent interest. The balance of the loan at the time of sale was $148,500 with a remaining term of 15 years (monthly payments). The appraiser determines that if a $148,500 loan was obtained on the same property, monthly payments at the market rate for a 15-year fully amortizing loan would have been 8 percent with no points.

a. Assume that the buyer is expected to benefit from the interest savings on the assumable loan for the entire loan term. What is the cash equivalent value of the property?

b. What is the cash equivalent value of the property if you assumed that the buyer is only expected to benefit from interest savings for five years because he would probably sell or refinance after five years?

 

A borrower is making a choice between a mortgage with monthly payments or biweekly payments. The loan will be $230,000 at 6 percent interest for 20 years.

a. What would be the maturity period if payments are bi-weekly? How much will the borrower pay in total under each payment option? Which choice would be less costly to the borrower? Hint: Assume 26 total bi-weekly payments per year for the maturity period.

b. Assume that the bi-weekly loan was available for 5.75%. What would be the maturity period if payments are bi-weekly? How much will the borrower pay in total under each payment option? Which choice would be less costly for the borrower?