Assume you have decided to buy a new house in Malibu that costs $1,000,000 (a bargain for that community). You want to get a conforming mortgage. Assuming no points, how much cash do you need to bring to the closing? Also, assume there are no other fees.
The next seven questions will work with this situation.
How much is the mortgage for?
Staying with that same mortgage situation, your mortgage broker has offered you a couple of differing mortgage products. For now, let's work with mortgage A: a 30-year fixed-rate mortgage with a 7% rate and no points.
What is the monthly payment?
For this fixed-rate mortgage with no points (Mortgage A), what is the effective yield expressed in %?
Now, let's think about Mortgage B, a 30-year adjustable-rate mortgage with no points. Like the prior mortgage, it is a conforming mortgage. The interest rate offered is 5%, and it resets after year 2 at 100 basis points over the 3-year Treasury. The annual rate increase is capped at 150 bps.
What is the initial monthly payment?
How much do you owe on this mortgage on the two-year anniversary?
On the second anniversary, the 3-year Treasury is trading at 8%. What is your new mortgage interest rate in %? Don't forget to include the impact of the cap if it is relevant.
Lastly, what is your new payment after the interest rate resets?