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