An ARM for $100,000 is made at a time when the expected start rate is 5 percent. The loan will be made with a teaser rate of 2 percent for the first year, after which the rate will be reset. The loan is fully amortizing, has a maturity of 25 years, and payments will be made monthly.
A. What will be the payments during the first year?
B. Assuming that the reset rate is 6 percent at the beginning of year (BOY) 2, what will payments be?
C. By what percentage will monthly payments increase?
D. What if the reset date is three years after loan origination and the reset rate is 6 percent, what will loan payments be beginning in year 4 through year 25?