Question

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

25 year 5/1 ARM at 4% with a 2/7 cap structure

What are the maximum interest rates for the 6th year and for the life of the mortgage?

Answer 1

I'm really bad at mortgages...

Answer 2

is there a book or website to go along with this?

Answer 3

its on FLVS its practice questions it just gives examples

Answer 4

Prorated interest

Doug closes on May 11, so his first payment will be July 1. The July payment will include interest for the month of June. Doug must pay the bank the interest expenses from May 11 to May 31. He must count the 11th because he owned the property on the day of closing. Doug must pay 21 days of interest.

The annual interest rate is 6.6%, which means the interest on the loan is 0.066times 240,000 equals $15,840 per year. To find the daily interest, divide this amount by 365. So, the daily interest is 15,840 divided by 365 nearly equals $43.40.

Multiply the number of days by the interest per day: 21 times 43.40 equals $911.40. Doug is responsible for $911.40 in prorated interest on the mortgage.

Prorated Property interest

Because the property taxes were paid in advance, the seller paid for the whole year. This means that Doug must pay the seller the property tax for the number of days Doug owns the property.

The closing date is May 11 so the seller owned the house from January 1 to May 10. Remember that the buyer owns the property on closing day. Count the days for each month, assuming the year is not a leap year:

January is of 31, February is of 28, March is of 31, April is of 30, and May is of 10.

So, the total days the seller owned the house is 31 plus 28 plus 31 plus 30 plus 10 equals 130 days. This means Doug owns the house for 365 minus 130 equals 235 days.

The total property tax paid was $2,640, so the tax per day is approximately $7.23 per day.

Multiply the number of days by the property tax per day: 235 times 7.23 = $1,699.05.