You are planning to pursue a MS degree in engineering. The program will require 2 years, at which time you will likely go to work in the same city. You have decided to purchase a house and live in it for 3 years. The house costs \($90\),000, and after a down payment of \($4\),500 you will finance \($85\),500. You want to consider both low payment loans and those requiring the lowest cash to close. You are considering three loans and in all cases points apply to only the \($85\),500: (1) a 30-year conventional for 6.750 percent with 0.125 points plus \($4\),065.13 in other closing costs, (2) a 30-year ARMloan at 5.250 percent with 2.375 points plus \($5\),991 in other closing costs, and (3) a 30-year balloon loan at 4.850 percent, 1.100 points, plus \($6\),500 in other closing costs. The ARM in part (2) can go either up or down by 100 basis points per year (1 percent) and will be ‘‘locked in’’ after 3 years, you wish to evaluate the ARMboth (i) remaining constant over the 3 years, and (ii) under the worst-case result where it starts at 5.250 percent and in the second and third years it increases by 1 percent.

a. For each loan, determine the monthly payment (years 1 through 3 for the ARM).

b. Perform a PW analysis, assuming you continue to own the house exactly 3 years. Your TVOM is 5.3 percent.