A 30-year FRM at 6% and 2 points, with total fees of $2500, is being compared to a 30-year ARM that has an initial rate of 2.95% for 3 months after which the rate adjusts monthly. The ARM is indexed to COFI, the most recent value of which is 1.5%. The margin is 2.5% and the maximum and minimum rates are 11% and 3%, respectively. The ARM has 1.5 points but other fees are the same as on the FRM. The initial payment of $737.50 holds for 12 months, and adjusts every 12 months thereafter, subject to a 7.5% payment cap. There is a negative amortization cap of 115%. David 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 and as fast as the contract allows.

A 15-year FRM at 5.5% and 1.5 points 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 is identical to the ARM in example 1 except that instead of a negative amortization cap, it has a recast period of 5 years. David wants to compare the 2 loans on the assumption that the index rate rises by 1% a year for 6 years, and also on the assumption that the index declines by .5% a year for 3 years.

Using the same mortgages as in case 2 above, David 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.