A basic 30-year ARM is made for $300,000 with an initial interest rate of 2%. Payments are monthly. The rate will reset every year. The index is the one-year Treasury and there is a 2% margin. There are no relevant caps. The Treasury rate at the beginning of year 2 is expected to be 3% and it is expected to be 4% at the beginning of year 3. You expect that the loan will be paid off at the end of year 3.
a. Calculate the payments and loan balances for years 1, 2, and 3.
b. If the lender charges 3 points, what is the yield on the loan?