Question

A borrower received a 30-year ARM mortgage loan for $200,000. Rate caps are 3/2/6. The start rate is 3.50% and the loan adjusts every 12 months for the life of the mortgage. The index used for this mortgage is LIBOR (for this exercise, 3.00% at the start of the loan, 4.45% at the end of the first year, and 4.50% at the end of the second year). The margin on the loan is 3.00%, which remains the same for the duration of the loan