Question

4. Jackie obtains a 30-year 4/2 ARM at 5% with a 4/7 cap structure in the amount of $313,500.
What is the monthly payment during the initial period?
(1 point)
$1,832.69
$1,496.70
O $1,682.94
$870.83

Answer 1

The interest rate in during the initial period is given from which the

monthly payment is calculated to be $1682.94

Response (approximate value):

• The monthly payment during the initial period is $1,682.94

What is an ARM and how does it determine the monthly payment?

The type of loan Jackie obtains is an Adjustable Rate Mortgage, ARM,

loan, which is a 4/2 ARM

Therefore;

The introductory interest rate of 5% is fixed for the first 4 years, and will

be adjusted every 2 years after the first four years.

$Initial \ monthly \ payment, \ M = \mathbf{\dfrac{P \cdot \left(\dfrac{r}{12} \right) \cdot \left(1+\dfrac{r}{12} \right)^n }{\left(1+\dfrac{r}{12} \right)^n - 1}}$

Where;

M = The monthly payment during the initial period

P = The amount on loan = $313,500

r = 5% = 0.05

n = 30 × 12 = 360

Which gives;

• $M = \dfrac{313500 \times \left(\dfrac{0.05}{12} \right) \cdot \left(1+\dfrac{0.05}{12} \right)^{360} }{\left(1+\dfrac{0.05}{12} \right)^{360} - 1} \approx \mathbf{1682.94}$

• The monthly payment during the initial period, M ≈ $1,682.94

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