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# Adjustable and Fixed Rate Mortgages

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Consider the following scenario:

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.

Unfortunately for John, 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?

#### Solution Preview

Please see the attachment. Please see the cell formula for calculation details.

Consider the following scenario: 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.

Unfortunately for John, interest rates go up by 1% for each of the five ...

#### Solution Summary

The solution explains how to calculate the total payments made under adjustable rate and fixed rate mortgage in the attached Excel file.

\$2.19