Question

A bank advertises a 3/1 ARM at 4.65% with a 3/9 cap.

What is the maximum interest rate that can be charged during the fifth year?

3%

4.65%

9%

10.65%

Answer 1

hint:

"a 3/1 ARM" means that you start at a fixed interest rate for the first 3 years and the interest rate will adjust every year after the first three years are up

the part where it mentions a "3/9 cap" tells us that the increase will be 3% each time there is an interest rate increase and the max increase is 9%

Answer 2

give him the answer

Answer 3

wait how do i do this exactly ? cause im confused

Answer 4

what's the starting interest rate

Answer 5

4.65

Answer 6

that interest rate will be fixed for the first 3 years (since it says "3/1 ARM")

Answer 7

on year 4, the interest rate will go up 3%

on year 5, it will go up another 3%

etc etc

until it goes up 9% (9% is the highest is can go up, it's not the max, it's the max amount it can increase)

Answer 8

so it will be 3%

Answer 9

no the 3% is the increase, not the final interest rate

Answer 10

oh okay that makes more sense so then? it would be 10.65?

Answer 11

yep, you have 2 years of 3% increases, so

4.65 + 3 + 3 = 10.65

Answer 12

awesome thanks can you help with two more please :)

Answer 13

you keep adding on 3% until you reach 9%

so the max you can go is 4.65 + 9 = 13.65%

Answer 14

well then my answer would have to be 10.65 because that is the biggest out of the 4 choices given correct?

Answer 15

i was just pointing out how that 9 plays a role

Answer 16

thanks could you help with this one?
Brent and Amanda are purchasing a house with a 30-year, 4/1 ARM for $395,000 at 4.65% with a
3/10 cap structure. What will the difference in payments be from year 4 to year 5?

$1,282.03

$883.47

$576.77

$686.49

Answer 17

one sec

Answer 18

no problem :)

Answer 19

it helps to use calculators sometimes for things that get really ugly in terms of mathematics

Answer 20

in this case, I'm using the calculator at this link

http://www.calcxml.com/calculators/adjustable-rate-mortgage-calculator

Answer 21

and when i plugged in all the values, i got this table/report

Answer 22

I want you to open up that report and tell me what the payments are for periods 48 and 49 (ie months 48 and 49)

Answer 23

48 368,963 1,430 2,037 368,356 4.65%
49 368,356 2,348 2,723 367,981 7.65%

Answer 24

good, now read off the payments

Answer 25

2,037

Answer 26

that's for month 48

Answer 27

2,723

Answer 28

and that's for month 49

Answer 29

the difference of the two is your answer (or close enough, there's round off error apparently)

Answer 30

686

Answer 31

yep

Answer 32

alright awesome can u help with one more i promise

Answer 33

ok last one

Answer 34

thanks sorry Karla and Juan are purchasing a house and are financing $590,000. The mortgage is a 20-year
6/1 ARM at 3.75% with a 3/8 cap structure. What will the remaining balance be after the first 6 years?

$456,659.67

$481,013.90

$531,456.17

$506,961.20

Answer 35

I want you to try out that calculator I gave you

Answer 36

go ahead and enter the given info into it and make the report and post it if you can

Answer 37

okay (:

Answer 38

could you explain how exactly each one means like i dont understand what goes where

Answer 39

how much is being loaned

Answer 40

590000?

Answer 41

that goes in the "Loan amount ($)" box

Answer 42

and then 3.75%

Answer 43

the "Initial interest rate: (%)" box is 3.75

this is because the initial interest rate is 3.75%

Answer 44

do NOT enter the percent sign though

Answer 45

i didnt

Answer 46

this is a 20 year loan, so 20*12 = 240 months

that means 240 goes in the "Number of months: (30yrs=360)" box

Answer 47

i got that

Answer 48

Absolute minimum rate over term of loan: (%)

that's the same as the initial interest rate

Answer 49

gotcha (:

Answer 50

Absolute maximum rate over term of loan: (%)

that's the highest the interest rate can go (at any point in the loan), they call this the cap

this is 3.75+8 = 11.75

note: the 8 comes from the piece where it says " 3/8 cap structure"

Answer 51

so again the number 11.75 goes in the "Absolute maximum rate over term of loan: (%)" box

Answer 52

yes :)

Answer 53

"Number of months before first rate adjustments"

that's how long the initial interest will stay fixed, this is 6 years or 6*12 = 72 months (drawn from the fact it's a "6/1 ARM")

so 72 goes in this box

Answer 54

okie doke

Answer 55

Number of months between rate adjustments

tell me what goes in this box

Answer 56

would i do 3*12=36

Answer 57

remember what the 1 in the "6/1 ARM" stands for?

Answer 58

the 6 means that you'll have 6 years of fixed interest

but what does that 1 mean?

Answer 59

the loan in the 1 year

Answer 60

1st*

Answer 61

what about the first year?

Answer 62

out of the 6

Answer 63

ok, what about the first year though?

Answer 64

the rate?

Answer 65

but the rate is fixed throughout the first six years

Answer 66

go back to what I said the "3/1 ARM" means (scroll up to the top of the page)

Answer 67

the increase?

Answer 68

good, what specifically about the increase?

Answer 69

im not sure to be honest

Answer 70

go back up and read it again if you need to

Answer 71

it will increase in interest after the 3 years?

Answer 72

yes, the 3/1 means you start fixed the first 3 years

then you increase the interest rate how often?

Answer 73

3%

Answer 74

or would it be in this case 3.75%?

Answer 75

how often do you increase the interest rate on a 6/1 ARM

Answer 76

how frequently

Answer 77

after the 6 years

Answer 78

each year

Answer 79

yes, but how often

Answer 80

good

Answer 81

that's what the 1 means

Answer 82

1 year = 12 months

Answer 83

so 12 goes in the "Number of months between rate adjustments"

Answer 84

okay so what shall i do for 3/8?

Answer 85

so what does the 3/8 mean?

Answer 86

and would we have to change the rate assumption?

Answer 87

would the assumption be .375%

Answer 88

well we already used the 8 when we applied the max interest rate remember?

Answer 89

the 3 in the 3/8 will be used in the last box which is the "Assumed rate adjustment: (%)" box

Answer 90

btw, the interest rate will always be increasing, so don't worry about the drop box

not sure why they have a "decreasing option"

maybe there are some rare options where they do decrease, but I've yet to see them

Answer 91

once all the numbers are in place, hit "submit" and you'll get a very very big table

this is just a table telling you how much your payment is at any given point in time (and how much principal and interest you pay, and your remaining balance)

Answer 92

is the assumption .375% ?

Answer 93

no

Answer 94

or 3

Answer 95

3 because it's the first number in the 3/8 cap structure

Answer 96

okay so im submitting it now

Answer 97

3/8

3 ----> increase 3% each time
8 ----> can only increase it a max of 8%