Question

REALLY NEED HELP FOR UNDERSTANDING. Dealing with an Adjustable Rate Mortgage and need to figure out monthly payments. Please help, I really need to know how to do this!

Answer 1

Adjustable Rate Mortgage: 3% with terms 5/1 with a 2/6 cap for 30 years
(Assume the interest rate increases by 1.25% after the initial period and every 10 years thereafter.)

ARM loan of : $130,000

Answer 2

The first # in the term 5/1 : is the initial interest rate period.
The second # in the term 5/1 : tells how often the interest rate can adjust.

So, the mortgage will have a fixed rate for 5 years, after which it can adjust each year.

The 2/6 cap means the interest rate can adjust up to 2% for each adjustment period, but will never exceed 6% more than the initial interest rate. This means, the maximum interest rate for this mortgage is 9%.

I feel this first part of the information is correct, but it needs to be checked please.

Answer 3

@TheSmartOne ! Could you help me with this ARM?

Answer 4

anyone?

Answer 5

sorry would have to think

Answer 6

sorry, this is a lot. just any help I can get, trying to finish up senior year.

Answer 7

@imqwerty

Answer 8

It is not from honesty to answer a question I do not know.
I really don't know. Sorry for disappointing you!

Answer 9

no no! thank you for letting me know @3mar !!!

Answer 10

you have the correct interpretation so far @givingtree

Answer 11

Thank you. I just don't know how to set it up, like what number would i put in for the i variable, interest?

Answer 12

most likely i = 0.03/12 = 0.0025 since I'm assuming the i refers to the monthly interest rate. It's not 100% clear though.

Answer 13

i = periodic interest rate = \[\frac{ r }{ n }\]

Answer 14

ok so r = 0.03 and n = 12

Answer 15

it might be safer to do a fraction in this formula?

Answer 16

decimal form may be easier

Answer 17

true.

Answer 18

let me set up the problem and check back with you to see if it's correct?

Answer 19

I can pay you through paypal.

Answer 20

?

Answer 21

http://www.bankrate.com/calculators/mortgages/adjustable-rate-mortgage-arm-calculator.aspx

this is telling me that there are 4 different payment values, so I'm not sure if your teacher wants all 4 or just the initial payment or maybe the max payment?

Answer 22

Getting a picture for you.

Answer 23

does that help at all?

Answer 24

That table is what your teacher gave you?

Answer 25

yes, that i put on paper.

Answer 26

This piece of info
`Adjustable Rate Mortgage: 3% with terms 5/1 with a 2/6 cap for 30 years`
and this piece of info
`(Assume the interest rate increases by 1.25% after the initial period and every 10 years thereafter.) `
don't match up fully

Answer 27

I don't know what to say, it's just what i was given .-.

Answer 28

but I'm assuming your teacher wants you to go with `(Assume the interest rate increases by 1.25% after the initial period and every 10 years thereafter.)`

Answer 29

because the other option has it increasing every year

Answer 30

So, what should I do?

Answer 31

I'd go with the second one. Anyways, I'm assuming you know the fixed rate mortgage payment formula?

Answer 32

absolutely

Answer 33

what is the monthly payment for those first five years (year 1 through year 5) ?

Answer 34

i haven't solved for that part yet, or any. um lemme put the formula together real quick to check

Answer 35

what would be the i ?

Answer 36

Like, will the value of i, (aka r/n) change for each period?
1-5
6-15
16-25
26-30

Answer 37

or stay the same?

Answer 38

for year1 through year5, i = 0.03/12 = 0.0025

Answer 39

and after year1 through year5, i would change to?

Answer 40

r would increase 1.25% each time

year1 through year5: r = 3% -----> r = 0.03
year6 through year15: r = 4.25% -----> r = 0.0425
year16 through year25: r = 5.5% ----> r = 0.055
year26 through year30: r = 6.75% ----> r = 0.0675

i = r/n

Answer 41

n = 12 the whole time

Answer 42

Perfect thank you!!! I'll get to solving now!

Answer 43

\[m = \frac{ (130000)\frac{ .03 }{ 12 }(1+\frac{ .03 }{ 12 } ) ^{360} }{ (1+\frac{ .03 }{ 12 } )^{360} -1 }\]

Answer 44

did i set this up correctly?

Answer 45

yes you did

Answer 46

yay! i'll solve to find all the year periods now. brb

Answer 47

hey, I really appreciate you for taking all this time to help me. almost done!!

Answer 48

what is the monthly payment for the first 60 months?

Answer 49

$548.09 for year1-year5

Answer 50

good

how much interest is paid for the first month?

hint: monthly interest rate = (3%)/12 = 0.25%

Answer 51

uummmmmmmm

Answer 52

one sec *

Answer 53

interest rate for a month is going to be 0.025?

Answer 54

interest due for given month = (monthly interest rate in decimal form)*(balance owed)

interest due for month1 = (0.0025)*(130,000)

interest due for month1 = $325

Answer 55

make sense?

Answer 56

the (.03/12) was just simply reduced to .0025, yes makes sense

Answer 57

so $325 is the amount in interest to be paid

$548.09 is the monthly payment

548.09-325 = 223.09 is the principal paid

Answer 58

this stuff is so much...

Answer 59

after paying off 223.09 in principal, the balance goes from $130,000 to $129,776.91

this is all shown in the attached image on the highlighted line

Answer 60

it's a lot given there are 360 of these payments to make. Which is why calculators and spreadsheets are very handy

Answer 61

i bet!!

Answer 62

again I used

http://www.bankrate.com/calculators/mortgages/adjustable-rate-mortgage-arm-calculator.aspx

to make up that payment schedule

Answer 63

bookmarking that thank you.

Answer 64

so the monthly payment will not change?

Answer 65

for month1 through month60, the payment is 548.09

Answer 66

if you generate a payment schedule, you'll see the payment go up at month 61

Answer 67

from 548.09 to 626.13

Answer 68

you're probably wondering how to get 626.13 ?

Well what you do is use that table to see the remaining owed balance at month 60 (after payment is made for that month). That balance is used to recalculate the monthly payment. Instead of 360 months, it's now 300 months since 60 months have already been paid off. The value of i will increase to what was discussed above

Answer 69

okay i see!!! thank you ! i did wonder.

Answer 70

so in a sense, you're calculating the mortgage monthly payment 4 times.

Answer 71

now, to filling out the chart, the # of payments column will all be 360
monthly payment column will be all $548.09
?

Answer 72

year1 through year5 represents 5 years

(5 years)*(12 months/1 year) = 5*12 = 60 months

Answer 73

year6 through year15 represents 10 years

10 years = 10*12 = 120 months

Answer 74

You get the idea. Be careful about the last period

Answer 75

also,

total cost = (number of months)*(monthly payment)

Answer 76

year16-25 = 9(12) ?

Answer 77

no, year 16-25 would be 120 as well?

Answer 78

and 26-30 would be 60 ?

Answer 79

@jim_thompson5910

Answer 80

year1 through year5 = 60 months
year6 through year15 = 120 months
year16 through year25 = 120 months
year26 through year30 = 60 months

Answer 81

60+120+120+60 = 360 months total

Answer 82

awesome, thank you! then i just multiply the months by $548.09!

Answer 83

for year1 through year5, yes

Answer 84

oh my god
im so stupid,

Answer 85

that will give the total cost for that time period