Example 1: A 30year 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 30year 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.


Example 2: A 15year 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 30year 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.


Example 3: 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.

