The purchase price and value of a home are $200,000. A borrower secures an 80% LTV, 30 year ARM with an initial interest rate of 4% to finance the purchase. Mortgage terms call for annual interest rate adjustments. The lender and borrower agree to use the ten year treasury rate as the index with a 2% margin when the interest rate adjusts. There is a 2% annual rate cap.
a. What is the monthly payment for the first year and what is the loan balance at the end of the first year?
b. If, when the interest rate adjusts, the treasury rate is 8%, what is the monthly payment for the second ?
Please provide explanation and how you did this using a financial calculator.