Suppose that you are considering borrowing $175,000 in the form of an adjustable-rate mortgage. Use the information provided below to answer the questions that follow.
Index Rate: Prime Rate (Currently 0.45%)
Margin: 275 basis points
Periodic Cap: 2 percentage points
Lifetime Cap: 5 percentage points
Amortization: 30 years
a. What will your initial monthly payment be for this loan?
b. Suppose that you were able to lock-in your initial payment for the first 2 years of the loan. If the prime rate increases to 1.1% over that period of time what will your monthly payment be for year 3?