adjustable rate mortgage vs. fixed rate mortgage question……finance question?

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Consider the following scenario: John buys a house for $ 150,000 and takes out a five year adjustable rate mortgage with a beginning rate of 6%. He makes annual payments rather than monthly payments.

Unfortunately for John, interest rates go up by 1% for each of the five years of his loan (Year 1 is 6%, Year 2 is 7%, Year 3 is 8%, Year 4 is 9%, Year 5 is 10%).

Calculate the amount of John’s payment over the life of his loan. Compare these findings if he would have taken out a fix rate loan for the same period at 7.5%. Which do you think is the better deal?

I worked out the problems and i ended up getting these
Adjusted rate
year one=9000
year 2= 10500
year 3= 12000
year 4= 13500
year 5= 15000
total= 60000

fixed rate
150000*7.5%=112500
112500*5=562500

so the best one would be the adjustable rate. Am i correct? If I am not please show me how to do the problem thanks

1 Comment
  1. Reply
    golferwhoworks
    February 14, 2011 at 6:16 am

    well first of all you need a mortgage calculator and then you need an amortization schedule as well. The first 5 years are fixed then the note can adjust up or down but never short of the start rate of 6%, Then all notes have a cap or a ceiling rate as well and these are normally 6% over the floor rate of 6% so it could max at 12%. The the last thing to know is the term of the note.
    What you are showing in your problem is a 1 year arm not a 5 year arm.
    Fixed rates are always better for any client unless they know beyond any shadow of a doubt that they will sell and move in the first few years. That is very rare. In the past few years only had 1 client demand a 5 year arm and he gave me his reasons for it. Moving in 3 years time and that was a must for him.
    Oh the total of payments on a 30 year fixed @ 7.5% is $ 377,575.83 on a 15 year note is $ 250,293.34
    I am a mortgage banker in TN

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