A 30-year FRM at 7.5% and 2 points, with a $350 application fee, credit report fee of $50, appraisal fee of $400, and miscellaneous other fees of $300. This is being compared to a 30-year ARM that has an initial rate lasting for 3 years of 6%. The ARM has 1.5 points but other fees are the same as on the FRM. The ARM is indexed to COFI, the most recent value of which is 1.5%, and the margin is 3%, the rate adjusts annually after 3 years with all rate adjustments subject to a 2% maximum change, and the maximum and minimum rates are 12% and 4%, respectively. John wants to compare the 2 loans on the assumption that the index rate does not change, and alternatively on the assumption that rates increase steadily by 1% a year for 5 years.

A 15-year FRM at 7% and 1.5 points also has a $350 application fee, credit report fee of $50, appraisal fee of $400, and miscellaneous other fees of $300. This is being compared to a 30-year ARM that has an initial rate lasting for 5 years of 6.5%. All the fees on the ARM are the same as on the FRM. The ARM is indexed to COFI, the most recent value of which is 1.5%, and the margin is 2.75%. The rate adjusts annually after 5 years with the first rate adjustment subject to a 5% maximum change and subsequent adjustments subject to a 2% maximum. The maximum and minimum rates are 11.5% and 4%, respectively. John wants to compare the 2 loans on the assumption that the index rate does not change, and alternatively on the assumption that rates increase by as much as the contract allows.

Using the same mortgages as in case 2 above, John wants to make a comparison based on the assumption that rates fluctuate up and down by 1.5% every 2 years. In one case, he wants the increase to occur first, and in another he wants the decrease to occur first.