Textbook Problem

Larry and Cindy Lynden purchased a townhome in Alison Estates with an adjustable-rate mortgage. The lender's margin on the loan is $4.1\%$ and the overall rate cap is $5\%$ over the life of the loan. The current index rate is the prime rate, 3.25%.

a. What is the calculated interest rate of the ARM?

Calculated ARM interest rate = Index rate + Lender's margin

Calculated ARM interest rate $=3.25+4.1=\underset{\_}{\underset{\_}{7.35}}\%$

b. What is the maximum overall rate of the loan?

Maximum overall ARM rate = Initial rate + Overall rate cap

Maximum overall ARM rate $=7.35+5.0=\underset{\_}{\underset{\_}{12.35}}\%$