Question 1

Constant Payment Mortgage [30 points] – Create an amortization schedule and answer the following questions for a $600,000 30-year fixed-rate, constant-payment mortgage that is partially-amortizing with a balloon payment of $100,000. The contract interest rate is 3.25% with monthly payments. Up-front fees on the loan equal 3.0% and there is no pre-payment penalty.

a.) What is the annual percentage rate (APR) for the loan?

b.) What is the effective interest rate (EIR) on the loan if prepaid at the end of year 7?

c.) What is the EIR if the loan is prepaid at the end of year 7 and there is a 2% prepayment penalty? (Hint: the prepayment penalty is 2% of the remaining balance)

—————————————–

Question 2

Constant Amortizing Mortgage [30 points] – Create an amortization schedule and answer the following questions for a $600,000 30-year fully-amortizing CAM loan with monthly payments. The contract interest rate on the loan is 3.25% and there are no points associated with the loan.

a.) Assuming no upfront fees/points or prepayment penalty, what is the EIR if the mortgage is prepaid in full at the end of year 7?

b.) Assuming 1 point in origination fees but no prepayment penalty, what is the EIR if the mortgage is prepaid in full at the end of year 7?

c.) Assuming 1 point in origination fees and a 2% prepayment penalty, what is the EIR if the mortgage is prepaid in full at the end of year 7?

—————————————–

Question 3

Adjustable Rate Mortgage [40 points] – Create an amortization spreadsheet and answer the following questions for a $600,000 10-year 3/1 ARM loan that is fully-amortizing with monthly payments. The loan terms include a teaser rate of 2.0%. After the initial teaser rate period, the interest rate resets annually to the index rate plus a margin of 1.50%. The loan terms also include an annual interest rate cap of 2.0% and a lifetime interest rate cap of 6.0% over the initial teaser rate. Expectations for the beginning-of-year values for the appropriate index are as follows:

a.) Calculate the appropriate contract rate for years 1 – 10 and then complete the amortization schedule.

b.) What is the effective interest rate (EIR) for the loan if it is held to maturity (assume no upfront fees/points or prepayment penalties)?

c.) Assuming upfront points of 3.0%, what is the loan’s EIR if it is held until maturity?

d.) Assuming upfront points of 3.0%, what is the loan’s EIR if it is prepaid at the end of year 4 (assume no prepayment penalties)?