Question: Harrison Conway is choosing between a fix rate and an
Harrison Conway is choosing between a fix rate and an adjustable rate mortgage (ARM) for $300,000. Both are 30 year mortgages with monthly payments and compounding. The fixed rate is offered at 8% while the initial rate on the ARM is 6%. Harrison is concerned that inflation may be a problem within ten years and that rates may return to levels not seen since the mid 1980s, i.e., in the neighborhood of 12%. Compare the payment on the fixed rate loan to what Harrison would have to pay on the ARM if it reset to 12% after ten years. For simplicity assume just that one resetting occurs. Round all calculations to the nearest dollar.
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