Tom wants to borrow $200,000 to purchase a house, but wouldnt be able to afford the payments required for a standard 30-year mortgage, which currently has a rate of 6%. His mortgage broker says that he could get a mortgage that starts out at only 2%, which Tom could afford, but will have a rate higher than 6% in 2 years when the teaser period expires.

a. If Tom takes the loan, will he owe more or less than $200 thousand in 2 years? Why?

b. Tom reasons: If I take the loan, mortgage rates might go down, and then I can get a new loan at the lower rate. If rates go up, Ill just let the bank take my house. Does this plan make financial sense?

c. Is this plan ethical? Explain why or why not?