You wish to purchase a property for $600,000. 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 2.75% with $3000 in closing costs. Alternatively, you can choose a 30 year, 5/1 ARM with an interest rate of 5%. The ARM has closing costs of $7000. The ARM has an annual cap of 1% and a lifetime cap of 5%. Assume a worst case scenario (for you, the borrower) for interest rates throughout What is the effective rate on the fixed rate mortgage if you keep the property 30 years or longer? Multiple Choice 2.7500% 3.1472% 2.9841% 2.798496 You wish to purchase a property for $600,000. 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 2.75% with $3000 in closing costs. Alternatively, you can choose a 30 year, 5/1 ARM with an interest rate of 5%. The ARM has closing costs of 57000. The ARM has an annual cap of 1% and a lifetime cap of 5%. Assume a worst case scenario (for you the borrower) for interest rates throughout. Which loan is better if you anticipate holding the property for 5 years and why? Multiple Choice The fixed rate loon is better because it has a lower effective rate and the payments will not change during the 5 years If you are sure that you will hold the property for 5 years or less, the ARM is the better choice because it has a lower effective rate and the payment will not change over the 5 year holding period. If you can handle changing payments because of changing interest rates, the ARM is better because it has a lower effective rate. The fixed rate loan is better because the payments do not change during the 5 year holding period