You wish to purchase a property for $400,000. You intend to make a 20% downpayment and you have the money to do so. You have two mortgage choices. You can finance the remaining 80% with a 30 year fixed rate mortgage at an interest rate of 3% with no closing costs (technically, the lender pays all closing costs at this rate). Alternatively, you can choose a 30 year, 5/1 ARM with an interest rate of 1%. The ARM has an annual cap of 2% and a lifetime cap of 5%, and $2,000 in closing costs. Assume a worst case scenario (for you, the borrower) for interest rates throughout. What is the effective rate on the ARM if you keep the property 30 years or longer? 3.67% 4.04% 3.1% 1.85%