An Adjustable Rate Mortgage The Pourans purchased
a new home for $378,000 with a down payment of $127,000. They obtained a 10-year adjustable rate mort- gage with the following terms. The interest rate is based on the one-year Treasury bill rate, which is currently at 2.5%, and the add-on rate, which is 3.5%. The initial rate period is 5 years, and thereafter the interest rate is adjusted once a year and a new monthly mortgage payment is calculated.
a) Determine the Pourans’ initial ARM rate.
b) Determine the Pourans’ initial monthly payment for
principal and interest.
c) If, after the 5-year initial rate period, the rate of the one-year Treasury bill falls to 1.5%, determine the Pourans’ new ARM rate.