Two alternatives has lowest effective borrowing cost

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Reference no: EM132044623

George would like to borrow $114,000 using an adjustable-rate mortgage instrument. He has the following two options available:

a) 1-year ARM, 15-year amortization schedule, 4.50% initial interest rate, 2% margin, 2% annual interest rate cap, 4% lifetime cap.

b) 1-year ARM, 20-year amortization schedule, 4.25% initial interest rate, 1.75% margin, no caps.

Assume that each of these loans is indexed to the 1-year Treasury rate and that this index is expected to have a value of 5% at the end of the first year and 7.5% at the end of the second year.

If George’s expected holding period is 3 years, which of these two alternatives has the lowest effective borrowing cost?

Reference no: EM132044623

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