You expect to live for 7 years in a house you are planning to purchase with a

You expect to live for 7 years in a house you are planning to purchase with a $280K loan.

You could get a 5/1 ARM amortized over 15 years at 3.9 % APR or a fixed 15 year loan at

5.3% APR. Assume the upfront costs and insurance under the two loan options are the same.

Moreover suppose the expected interest rate of the ARM from year 5 to 7 is 7.5%. Your

MARR is 10% per year compounded monthly. The first payment for both mortgage options

is due at the end of a January. Which loan would be a better choice? Just consider the PV of

the payments do not consider tax benefits of interest payments.

a. ARM Loan (PV) ________________________

b. Fixed Loan (PV)_________________________

c. Your choice?____________________________