Problem (a). 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: 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, and Discount Points = 2 percent

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Problem(b). 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: Initial Interest rate 6.00%, Index =1 year treasury, Margin = 2 percent, Interest rate Cap = None, Payment Cap = None, Negative amortization = Not allowed, Discount Points = 2 percent. BOY#2 = 9.00% BOY#3 = 10.50%, BOY#4 = 11.50%, BOY#5 = 13.00%

YEARS BEG Rate Term PMT INT AMORT END CF

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c) If you were a lender which loans terms would you prefer Problem a or b, and why?