Adjustment cycle with no upfront payment of fees

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Reference no: EM131984438

A family has found their dream house. After a lengthy negotiation, the sellers agree to sell the house for $700,000. The family goes to a mortgage company to get a loan to pay for the home. The bank has determined the family is a good risk for the bank. The bank offers the family three different options for the mortgage. Option 1 is a 30-year 80% LTV with a fixed 3.0% interest rate and no upfront fees and no prepayment penalty. Option 2 is a 30-year 100% LTV with a fixed 3.25% interest rate and no fees or penalties. Option 3 is a 30-year 80% LTV with an adjustable 2.5% interest rate with a 1-year adjustment cycle with no upfront payment of fees. The interest rate is expected to increase to 5% in year 4. Assume the borrowers can get a 2.0% interest rate on risk-free investment. Which option is the best?

Reference no: EM131984438

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