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.

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?

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Originally Posted by JesusisLord

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.

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?

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Hello Jesus - are you looking for financing in heaven? You should already know the answer to this question :)...

Okay, whoever you really are, under the 1st scenario your total payments at 7.5% (assuming you'd be paying the original balance off after 5 years) would be $185,373.54 (to be exact).

For scenario 2, the variable rate option would cost you $185,122.22 over the five years. So the variable rate scenario would be a better option given the scenario you described. However, if this were a real scenario and you just went one more year to 6 years and added that 1% premium to the year 5 rate (now equaling 11%), then the fixed rate would be a better option that would save you almost $2,000.

Next time I'm going to charge you for the math ;)