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You are planning to purchase a house for $180,000. You will pay 20% down payment and...

You are planning to purchase a house for $180,000. You will pay 20% down payment and take a mortgage loan for the remaining 80%. You could get a 3/1 ARM amortized over 15 years at 3.9 % or a fixed 15 year FRM loan at 5.3%. The expected interest rate of the ARM from years 4 to 5 is 7.5%. You will live in the house for five years, and after that you expect to sell the house for $200,000 and pay off the remaining loan balance. Assume that the upfront costs and insurance under both loan options are the same. MARR is 10% per year compounded monthly. Which loan would be a better choice? Consider the NPW of the payments, and ignore the tax effects.

Fill out the following table. Also explain the equations you used to calculate the monthly mortgage payment for ARM in months 1-36 and in months 37-60 as well as for FRM in months 1-60.

Month number

ARM

FRM

0 (down payment)

1 to 36 (monthly mortgage payment)

37 to 60 (monthly mortgage payment)

60 (payment from selling the house)

60 (payment to pay off remaining loan balance)

NPW


Please show steps.

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