Question

A borrower takes out a 5/1 Hybrid ARM for $200,000 with an initial contract interest rate of 3.35%. The interest rate will adjust according to the 1 yr LIBOR rate, plus a margin of 2%. At the first reset date, 1 yr LIBOR is at 1%. What will the borrowers monthly payment be immediately after the first reset? (State the payment as a positive number. Unless otherwise stated, you can assume 5/1 ARMs have a term of 30 years. Round your answer to 2 decimal places.)

Answer 1

5/1 Hybrid ARM structure has fixed rate interest for first five years and then annual reset of interest rate.

Hence, Initial principal = $ 200,000

Tenor = 30 years (360 monthly installments)

initial contract interest rate = 3.35%

Therefore Monthly Payment = $ 881.43 (using excel PMT function)

After 5 years, new interest rate = 1 yr Libor + 2% = 1% + 2% =3.00%

Balance Principal = $ 178, 928.20

Remaining tenor = 25 years (300 monthly installments)

New Monthly Payment = $ 848.50 (using excel PMT function)