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You wish to purchase a property for $400,000. You intend to make a 20% downpayment and you have the money to do so. You have two mortgage choices. You can finance the remaining 80% with a 30 year fixed rate mortgage at an interest rate of 3% with no closing costs (technically, the lender pays all closing costs at this rate). Alternatively, you can choose a 30 year, 5/1 ARM with an interest rate of 1%. The ARM has an annual cap of 2% and a lifetime cap of 5%, and $2,000 in closing costs. Assume a worst case scenario (for you, the borrower) for interest rates throughout. What is the effective rate on the ARM if you plan to sell the property in 5 years? 1.28% 1% 1.14% 2.79%

You wish to purchase a property for $400,000. You intend to make a 20% downpayment and you have the money to do so. You have two mortgage choices. You can finance the remaining 80% with a 30 year fixed rate mortgage at an interest rate of 3% with no closing costs (technically, the lender pays all closing costs at this rate). Alternatively, you can choose a 30 year, 5/1 ARM with an interest rate of 1%. The ARM has an annual cap of 2% and a lifetime cap of 5%, and $2,000 in closing costs. Assume a worst case scenario (for you, the borrower) for interest rates throughout. What is the effective rate on the ARM if you plan to sell the property in 5 years? 1.28% 1% 1.14% 2.79%

Essentials Of Investments
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
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You wish to purchase a property for $400,000. You intend to make a 20% downpayment and you have the money to do so. You have two mortgage choices. You can finance the remaining 80% with a 30 year fixed rate mortgage at an interest rate of 3% with no closing costs (technically, the lender pays all closing costs at this rate). Alternatively, you can choose a 30 year, 5/1 ARM with an interest rate of 1%. The ARM has an annual cap of 2% and a lifetime cap of 5%, and $2,000 in closing costs. Assume a worst case scenario (for you, the borrower) for interest rates throughout. What is the effective rate on the ARM if you plan to sell the property in 5 years? 1.28% 1% 1.14% 2.79%
Transcribed Image Text:You wish to purchase a property for $400,000. You intend to make a 20% downpayment and you have the money to do so. You have two mortgage choices. You can finance the remaining 80% with a 30 year fixed rate mortgage at an interest rate of 3% with no closing costs (technically, the lender pays all closing costs at this rate). Alternatively, you can choose a 30 year, 5/1 ARM with an interest rate of 1%. The ARM has an annual cap of 2% and a lifetime cap of 5%, and $2,000 in closing costs. Assume a worst case scenario (for you, the borrower) for interest rates throughout. What is the effective rate on the ARM if you plan to sell the property in 5 years? 1.28% 1% 1.14% 2.79%
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