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As a lender for First Forearm Bank, you agreed to provide a $270,000 5/1 hybrid mortgage, at a 2.875% rate to a customer. After five years, the loan is indexed to one-year U.S. Treasury securities with a spread of 2.75% and a two percent annual interest rate movement cap after year five. The loan is expected to prepay at the end of year seven and has a 2-point loan origination fee and $1,200 in external appraisal/attorney/inspection costs. Expected one-year U.S. Treasury rates are as follows (i.e. the one-year U.S. Treasury Rate at the end of five years from today and six years from today)

Year Rate

5 2.57%

6 3.08%

What is the borrower’s cost of funds?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92251132

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