An ARM is made for $150,000 for 30 years with the following terms:
Initial interest rate = 7 percent
Index = 1-year Treasuries
Payments reset each year
Margin = 2 percent
Interest rate cap = none
Payment cap = 5 percent increase in any year
Fully amortizing, however, negative amortization allowed if payment cap reached. Based on estimated forward rates, the index to which the ARM is tied is focused as follows:
Beginning of year 2 = 7 percent
Beginning of year 3 = 8.5 percent
Compute the uncapped and capped payments, end of year loan balances.
Compute the uncapped and capped payments, loan balances, and yield for an ARM that has a maximum 5% annual payment cap and does allow negative amortization.
Principal = $150,000
Term = 30 years
Margin = 2.00%
Initial Rate 7.0%
This is the Solution -
Year BOY Payment EOY
Year Balance Uncapped Capped Balance
1 $150,000 $997.95 $997.95 $148,476
2 $148,476 $1,202.89 $1,047.85 $149,298
3 $149,298 $1,380.27 $1,100.24 $151,894
Can someone please explain to me how one would mathematically go about calculating these values for the first 3 years?