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Suppose you take a 3/1 interest-only ARM for $290,000, monthly payments, 30-year term. The initial contract rate is 2.80% and the contract rate for year

Suppose you take a 3/1 interest-only ARM for $290,000, monthly payments, 30-year term. The initial contract rate is 2.80% and the contract rate for year 4 is 3.30%. The lender charges 2 discount points. What is the effective cost of the loan if it is repaid at the end of year 3?

2.80%

3.30%

5.66%

6.23%

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