You expect to live in a house you are planning to own for 5 years, with a $300K loan. You could get a 3/1 ARM amortized over 15 years at 3.9 % or a fixed 15 year loan at 5.0%. Assume the upfront costs and insurance under both loan options are the same. Moreover, suppose the expected interest rate of the ARM for years 4 and 5 is 8.25%. MARR is 10% per year compounded monthly. Which loan would be a better choice (i.e. has lower discounted interest costs)? Just consider the PV of the payments (principle and interest), do not consider tax benefits of interest, or any differences in ownership equity at the end of the loan term.
a. ARM Loan (PV)
b. Fixed Loan (PV)
Your choice?______