Question: Kalid is purchasing a home but expects interest rates to fall, so he is choosing an 8.375 percent adjustable-rate mortgage with a 1-year adjustment interval.

Kalid is purchasing a home but expects interest rates to fall, so he is choosing an 8.375 percent adjustable-rate mortgage with a 1-year adjustment interval. During the first 3 years of his mortgage, he got lucky, and the interest rate fell 2.5 percent per year, but unfortunately his floor rate was 5.5 percent. Calculate his average interest rate for years 1-3 for his 30-year 2/6 ARM, assuming the maximum allowable adjustments for the time period.

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