Question: You have a choice between a 3 0 - year fixed rate loan at 6 . 5 % and an ARM with a first year

You have a choice between a

30 -

year fixed rate loan at

6.5 %

and an ARM with a first year rate of

2 % .

Neglecting compounding and changes in principal estimate your monthly savings with ARM during the first year on $

225, 000

loan. Suppose that the ARM rate rises to

8 %

at the start of the third year. Approximately how much extra will you pay then be payinf over what you would have paid if you had taken the fixed rate loan? What is the approximate monthly savings with the ARM during the first year?

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