You have taken out a 450000 11 ARM The initial rate of 50 an

You have taken out a $450,000, 1/1 ARM. The initial rate of 5.0% (annual) is locked in for 1 years. Calculate the outstanding balance on the loan after 3 years. The interest rate after the initial lock period is 5.5%. (Note: the term on this 1/1 ARM is 30 years).

Solution

PV = 450,000, FV = 0, N = 360, rate = 5%/12

use PMT function in Excel

monthly payments = 2,415.6973

put N = 12 and calculate FV

value of loan after 1 year = 443,360.8559

now the interest is adjusted to 5.5%

PV = 443,360.8559, FV = 0, rate = 5.5%/12, N = 29*12

use PMT function in Excel

monthly payments = 2,551.7282

put N = 24 and calculate FV (24 is used because 12 is already exhausted in the lockin period)

balance after 3 years = 430,209.07