Conventional fixed rate mortgage with an interest rate

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Reference no: EM131878484

Suppose you are going to buy a home worth $210,000 and you make a downpayment in the amount of $50,000. The balance will be borrowed from the Capital Savings and Loan Bank. The loan officer suggests the following two financing plans for the property:

Option 1: A conventional fixed rate mortgage with an interest rate of 5.85%, a term of 5 years, and an amortization of 25 years.

Option 2: A variable rate mortgage with an interest rate of prime plus 1%, that is, 3.25% as the prime rate is currently 2.25%, a term of 5 years, and an amortization of 25 years.

Suppose the prime rate will be adjusted up by a constant increment every 6 months. What will the prime rate have to be near the end of the term for the two options to be equivalent?

Reference no: EM131878484

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