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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?

  • Finance -

    When I answered this identical post for you yesterday, I was hoping you would make an attempt.

    It is not that hard.
    let the annual payment be x

    x(1.06)^-1 + x(1.07)^-2 + ... + x(1.10)^-5 = 150000
    take out x as a common factor to have

    x(1.06)^-1 + 1.07^-2 + ... + 1.10^-5) = 150000

    x = .... You do the button-pushing


    x( 1 - 1.075^-5)/.075 = 150 000
    I had calculated that for you in an earlier post when you asked for the chart.

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