You are a new loan officer with Alpha Mortgage, and the manager of the loan department hasjust presented a problem to you. He is unable to complete the APR calculation on anadjustable rate mortgage which a borrower applied for yesterday. The loan features initialpayments based on a 10% rate of interest, while the current composite rate on the loan is 13%.No discount points have been paid by any party to the transaction, and any differencebetween borrower payments and the interest payment required at the composite rate will beaccrued in the mortgage balance in the form of negative amortization. The mortgage amountdesired by the borrower is $65,000 for a 30-year term, but a one-time mortgage insurancepremium of $2,400 is being funded as a part of the loan amount, making the total loanbalance $67,400. The borrower is paying $1,600 in prepaid finance charges at closing.a. Determine the APR, assuming that the ARM is made with a 2% annual and 5% over-the-life interest rate cap.b. In what way does the APR disclosure aid the borrower in understanding the terms of thisspecific loan agreement? What are some of the problems with the APR calculations on ARMs?