Question

A bank advertises an adjustable rate mortgage with the following terms:

30 year 2/1 ARM at 6% with a 3/6 cap structure

What are the maximum interest rates for the 3rd year and for the life of the mortgage?

3rd year: 7%; Lifetime: 6%

3rd year: 7%; Lifetime: 11%

3rd year: 9%; Lifetime: 6%

3rd year: 9%; Lifetime: 12%

Answer 1

tell me your ideas on this one ...

Answer 2

2/1 means something and 3/6 means something

Answer 3

Do you like somehow have to add or multiply the cap and ARM ?

Answer 4

there is addition invloved; but lets make sure we understand the notation first ... what does the notation mean to you?

Answer 5

\[n/k~ARM\]
"\(n\)" defines the length of the intial period; and the "\(k\)" defines the bump.

2/1 ARM, has a fixed inital rate for the first 2 years, and for each 1 year afterwards the rate gets adjusted according to the cap notation.
--------------------------
\[a/b~cap\]

the cap tells us how the interest rate is to be modified: the "\(a\)" represent the increase in the interest rate. Whereas the "\(b\)" indicates the limit by which the rate can be raised.

A 3/6 cap tells us that the interest rate is to be raised by 3 points a year, but cannot exceed an increase of 6 points overall.

Answer 6

so, in this case:

y1 = 6%
y2 = 6%
y3 = 6% + 3%
y4 = 6% + (3% + 3%) <-- weve reached a maximum of 6% increase
y5 = 6% + (3% + 3%)
y6 = 6% + (3% + 3%)
...
y20 = 6% + (6%)

Answer 7

i prolly shoulda started at year0 to match the options

Answer 8

is it 3rd year: 9%; Lifetime: 12%

Answer 9

thats the one i would pick, yes