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(solution) Melinda is buying a house. She wants to get a mortgage loan for


Melinda is buying a house.  She wants to get a mortgage loan for $80,000, and she has two choices.  The closing costs for both loans are the same.

      The first is a fixed-rate loan, at 4.875% interest.

      The second is an adjustable rate loan (ARM).  The first year's interest rate is 3.25%.  The interest rate maximum adjustment caps are 2% per year, and 6% lifetime.  The index is the 1-year T-bill moving average. The adjustment margin is the index plus 2.75%.  Currently the index is 2.05% and it has been falling steadily for over a year.

      Melinda asks you to briefly explain these loan terms to her, and to briefly tell her what sorts of things she should consider in making her decision.  She does not ask you to make the actual decision for her -- you don't have to tell her which is better; only tell her what she needs to think about when she makes her decision.


Question: Melinda is buying a house. She wants to get a mortgage loan for $80,000, and she has

 

two choices. The closing costs for both loans are the same.

 

The first is a fixed-rate loan, at 4.875%...

 


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