1.You are interested in a $280,000 adjustable rate mortgage (ARM) with a 30-year term. For the first 5 years, the interest rates 3.5% for the first two years and 4% for the next two years and 4.5% for the last year. After the fifth year, the interest rate is set to be index to the U.S treasury bill

a)(10 points) Complete the following table for the ARM mortgage.

End of Year: Interest Rt Period (N) Monthly Pmt LoanBal

1 3.5% x x x

2 3.35% x x x

3 4% x x x

4 4% x x x

5 4.5% x x x

b)(2 points) You are also considering a $280,000 fixed-rate level payment mortgage (LPM) with a 30-year term and a 4.25% contract interest rate. At the end of 5 years, which mortgage has a larger balance? (Hint: You need to compute the monthly payments first)

2.(12 points) Leslie and Ben are interested in a $250,000 fully amortizing loan and are deciding between 2 options, mortgage A and mortgage B

Mortgage A

Mortgage B

Loan term: 30 years

Annual interest rate: 5.75 %

Monthly payments

Up-front financing costs: $4,500

Discount points: 2.5

Loan term: 15-years

Annual interest rate: 5.25 %

Monthly payments

Up-front financing costs: $7,500

Discount points: 2.5

a.)Calculate the monthly payments for mortgage A and B.

b.)Calculate the effective borrowing cost for or mortgage A and B.

c.)Calculate Lender's Yield for or mortgage A and B

d.)Suppose you are the borrower. Based on the effective borrowing costs, which loan would you choose? Explain your answer in

e.)Suppose you are the lender. Based on the lenders yield, which loan would you prefer? Explain your answer