You wish to purchase a property worth $500,000 with a $100,000 down payment. You
take out a 2/28 hybrid ARM with one-month LIBOR as the reference rate. There is a two-
year annual teaser rate of 2% and beginning in the third year the rate resets each year.
The margin is 3.5% annually. Assume the loan is fully amortizing and:
Find the monthly payments during the first two years.
Find the monthly payments during the third year assuming 1-month LIBOR is
0.5% annually at the beginning of year three.
Assume that the LIBOR rate quoted at the beginning of year three was manipulated as a
result of collusion among the banks. Specifically, assume that the “true” LIBOR rate at
the beginning of year three was 0.35%, despite the fact that the rate was quoted at 0.5%.
Calculate the difference in monthly payment the LIBOR manipulation resulted in.
A FHA HECM reverse mortgage is only required to be repaid (1) when the borrower
moves, or (2) when the borrower dies. Assume you take out a $300,000 reverse mortgage
loan, under the FHA program, for a term of 15 years at 7% annually. The reverse
mortgage makes monthly annuity payments. Now, let’s say you die 8 years after the loan
matures, but you have made no payments. Your family wishes to repay the loan
beginning 23 years after origination. What is the total amount they owe?
Compare the loan balance to be repaid in the previous question with the original loan
balance of $300,000. If they are the same, explain in detail why. Similarly, if they are
different, justify why they are different.