1.-

You want to buy a house for main residence and have the following four choices of mortgage with monthly payments. Suppose that your marginal tax rate is 25% and the market index will stay 10.5% after year 5.

Fixed-rate Mortgage Fixed-rate Mortgage Adjusted-rate Mortgage 3/1 Interest-only ARM

Mortgage Amount $100,000 $100,000 $100,000 $100,000

Term 30 years with monthly PMT 30 years with monthly PMT 30 years with monthly PMT 30 years with monthly PMT

Discounts Points 0 3.5 0 0

Initial Contract Interest Rate 9.75% 8.00% 8.10% 8.00%

Costs with Loan Orignation $5,000 $5,000 $5,000 $5,000

Margin 2.25% 2.25%

Caps 1% annual,3.9% lifetime 6% lifetime

Market Index End of Year (EOY) 1: 8.6%; EOY 2: 9.5%; EOY 3: 10.5%; EOY 4: 11.5%; EOY 5: 10.5%

1. If you hold the loan for the entire term, what is the annual effective cost of each mortgage before-tax?