You expect to live in a house you are planning to own for 5 years, with a $200K

Question

You expect to live in a house you are planning to own for 5 years, with a $200K loan. You could get a 3/1 ARM amortized over 15 years at 2.9 % or a fixed 15 year loan at 5.0%. Assume the upfront costs and insurance under both loan options are the same. Moreover, suppose the expected interest rate of the ARM for years 4 and 5 is 6%. MARR is 10% per year compounded monthly. Which loan would be a better choice (i.e. has lower discounted interest costs)? Just consider the PV of the payments (principle and interest), do not consider tax benefits of interest, or any differences in ownership equity at the end of the loan term.

ARM Loan (PV)

Fixed Loan (PV)

Your choice?____________________________

Explanation / Answer

ARM Loan Annual Installments -17439 Year Loan Interest Capital Pay Balance Cashflows PV at 10% Present Value 0 200000.00 0.00 0.00 200000.00 200000.00 1.00 200000.00 1 200000.00 -5877.72 -11561.29 188438.71 -17439.01 0.91 -15853.65 2 188438.71 -5537.95 -11901.06 176537.64 -17439.01 0.83 -14412.40 3 176537.64 -5188.19 -12250.82 164286.82 -17439.01 0.75 -13102.19 4 164286.82 -10132.85 -7306.16 156980.66 -17439.01 0.68 -11911.08 5 156980.66 -9682.22 -7756.79 149223.88 -17439.01 0.62 -10828.25 6 149223.88 -4385.48 -13053.53 136170.35 -17439.01 0.56 -9843.87 7 136170.35 -4001.85 -13437.16 122733.19 -17439.01 0.51 -8948.97 8 122733.19 -3606.95 -13832.06 108901.13 -17439.01 0.47 -8135.43 9 108901.13 -3200.45 -14238.56 94662.57 -17439.01 0.42 -7395.84 10 94662.57 -2782.00 -14657.01 80005.56 -17439.01 0.39 -6723.49 11 80005.56 -2351.25 -15087.76 64917.80 -17439.01 0.35 -6112.27 12 64917.80 -1907.84 -15531.17 49386.63 -17439.01 0.32 -5556.61 13 49386.63 -1451.40 -15987.61 33399.03 -17439.01 0.29 -5051.46 14 33399.03 -981.55 -16457.46 16941.57 -17439.01 0.26 -4592.24 15 16941.57 -497.89 -16941.12 0.45 -17439.01 0.24 -4174.76 67357.50 Fixed Loan Annual Installments -19420.1 Year Loan Interest Capital Pay Balance Cashflows PV at 10% Present Value 0 200000.00 0.00 0.00 200000.00 200000.00 1.00 200000.00 1 200000.00 -10232.38 -9187.72 190812.28 -19420.10 0.91 -17654.64 2 190812.28 -9762.32 -9657.78 181154.50 -19420.10 0.83 -16049.67 3 181154.50 -9268.21 -10151.89 171002.61 -19420.10 0.75 -14590.61 4 171002.61 -8748.82 -10671.28 160331.32 -19420.10 0.68 -13264.19 5 160331.32 -8202.85 -11217.25 149114.08 -19420.10 0.62 -12058.35 6 149114.08 -7628.96 -11791.14 137322.94 -19420.10 0.56 -10962.14 7 137322.94 -7025.70 -12394.40 124928.54 -19420.10 0.51 -9965.58 8 124928.54 -6391.58 -13028.52 111900.02 -19420.10 0.47 -9059.62 9 111900.02 -5725.02 -13695.08 98204.94 -19420.10 0.42 -8236.02 10 98204.94 -5024.35 -14395.75 83809.19 -19420.10 0.39 -7487.29 11 83809.19 -4287.84 -15132.26 68676.93 -19420.10 0.35 -6806.63 12 68676.93 -3513.64 -15906.46 52770.47 -19420.10 0.32 -6187.84 13 52770.47 -2699.84 -16720.26 36050.21 -19420.10 0.29 -5625.31 14 36050.21 -1844.40 -17575.70 18474.50 -19420.10 0.26 -5113.92 15 18474.50 -945.19 -18474.91 -0.41 -19420.10 0.24 -4649.02 52289.18 ARM Loan PV 67357.50 Fixed Loan PV 52289.18 My Choice is ARM Loan, as its Net cashflow is greater than Fixed Loan PV

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.