Question: You have a choice between a 30-year fixed rate loan at 3.5% and an adjustable rate mortgage (ARM) with a first year rate of 2%.

You have a choice between a 30-year fixed rate loan at 3.5% and an adjustable rate mortgage (ARM) with a first year rate of 2%. Neglecting compounding and changes in principal, estimate your monthly savings with the ARM during the first year on a $225 comma 000 loan. Suppose that the ARM rate rises to 7.5% at the start of the third year. Approximately how much extra will you then be paying over what you would have paid if you had taken the fixed rate loan?

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