2. Your good friend Jennifer is very optimistic about the housing market and believes that house prices can never go down. (Jennifer didn't pay much attention to what happened between 2006 and 2012). As a consequence, she wants to buy the most expensive home she can possibly afford, with the idea of selling this home at a profit in a few years. She has $4,000 per month that she can spend on the mortgage payment (and her parents offered to help out with the down payment).

Jennifer's lender has offered her three types of mortgages: a standard 30 year FRM, a 5/1 ARM with standard amortization, and a 5/1 ARM with a 5-year interest-only period. Jennifer asks you for help.

[Note: For simplicity, ignore taxes and tax deductions for this question].

A.Which mortgage type do you think is best given her objective?

5/1 ARM with a 5-year interest-only period

B.Go to bankrate.com to find the current interest rates on FRMs and 5/1 ARMs (assume both the 5/1 ARMs have this same interest rate). Based on this information, what is the size of the mortgage she would receive under the option you recommended in part A?

3.73% = FRM

4.02% = 5/1 ARM