1. Assume you need to borrow $150,000 to purchase a home. You plan on living in...

1.

Assume you need to borrow $150,000 to purchase a home. You plan on living in your new house for only 6 years, so you are trying to determine whether you want an

adjustable or fixed rate mortgage from your bank. Both loans would be amortized over 15 years. (assume monthly payments)

Adjustable Rate – Tied to the U.S. T-Bill rate, which is estimated to be 2.8% in Yr 1 and 3.1% in Yr 2. After the first 2 years, the rate adjusts to 6.2% for the remainder of the loan.

Fixed Rate – Borrow at 5.7% over the life of the loan.

a. Calculate the total balance remaining after 6 years for the adjustable rate.

b. Calculate the total balance remaining after 6 years for the fixed rate.

c. Assuming the estimated T-Bill rates is accurate, which mortgage would you prefer and why?

Expert Solution

1)remaining balance after 6 year when interest rate is adjustable

2) loan balance at the end of sixth year when interest rate is fixed

adjustable rate is preffered because more pricipal repaid and less interest paid

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jeff jeffy answered 2 years ago

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