You have a choice between a 30-year fixed rate loan at 6.5% and an adjustable rate mortgage (ARM) with a first year rate of 4%. Neglecting compounding and changes in principal, estimate your monthly savings with the ARMduring the first year on a $225,000 loan. Suppose that the ARM rate rises to 7% at the start of the third year. Approximately how much extra will you then be paying over what you would have paid if you had taken the fixed rateloan?What is the approximate monthly savings with the ARM during the first year?S (Round to the nearest dollar as needed.)

Monthly Interest Payment: It is the monthly interest payment made on the outstanding loan amount. Therefore, the monthly interest rate is charged on the loan balance to compute the monthly interest payment. Information Provided: Loan amount = $225,000 Term = 30 years Fixed rate = 6.5% Adjustable rate mortgage (ARM) = 4%Computation: Interest for first year at fixed rate 6.5%Interest=Loan amount * 6.5% * 1Interest=$225,000 * 6.5% * 1Interest=$14,625Interest for first year at ARM 4%Interest=Loan amount * ARMInterest=$225,000 * 4%Interest=$9000Computation: Yearly Savings=Fixed rate interest-ARM interestYearly Savings=$14,625-$9000Yearly Savings=$5625Monthly savings=Yearly savings12Monthly savings=$562512Monthly savings=$468.75Answer: The appropriate monthly savings with the ARM during the first year is $469.

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What is the approximate monthly savings with the ARM during the first year? | (Round to the nearest dollar as needed.)

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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