A borrower has been analyzing different adjustable rate mortgage (ARM) alternatives for the purchase of a property. The borrowers anticipates owning the property for five years. The lender first offers a $150,000. 30-year fully amortizing ARM with the following terms:

#2

Initial Interest rate 7.50%

Index = 1 year treasury BOY 2 9.00%

Margin = 2 percent BOY 3 10.50%

Interest rate Cap = 1% annual 3% lifetime BOY 4 11.50%

Payment Cap = None BOY 5 13.00%

Negative amortization = Not allowed

Discount Points = 2 percent

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