You have a achoice between a 30-year fixed rate loan at 3.5% and an adjustable r

Question

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

Explanation / Answer

Case 1

Interest on fixed rate loan at 3.5% = 0.035* 30000 = $1,050 p.a.

Interest on ARM at 2% = 0.02 * 30000 = $600 p.a.

Annual savings on interest = 1050-600 = $450

Hence, monthly savings = 450/ 12 = $37.5

Case 2

Interest on ARM at 7.5% = 0.075 * 30000 = $ 2250 p.a.

Interest on fixed rate loan at 3.5% = 0.035* 30000 = $1,050 p.a.

Hence amount paid extra = 2250 - 1050 = $1200 p.a.

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