Loan Options

1
Loan Options

• Which loan is best for you?
• Fixed vs. Variable
• Team 7 Guy Canedo, Nathan Sheagley, Thomas
  Nashed

2
What are we doing?

• When purchasing a home, and requiring a loan
  there are many options to consider. We will
  analyze and compare the main two types of loans
  using Future Worth Analysis.

3
Some Loan BackgroundFixed vs. Variable

• Adjustable Rate
• Mortgage (1 ARM)
• First year fixed interest rate
• Rates change monthly after fixed period
• Payment amount is not fixed.

• Fixed Rate
• Mortgage (FRM)
• Constant interest rate throughout the life of the
  loan, which produces constant payments

4
Scenario

• We want a 30-year loan of 500,000 to buy a
  house. Assuming No down payment no PMI.
  
• When we compare the 2 loan types over a 10 year
  period. We assume
  
• - a Fixed Rate Loan of 6.75
• - a 1 ARM Loan first year fixed at 6.45
  and different avg. interest rates for the
  
• remaining 9 years.
• We also assume that the house appreciation is
  equal to 3, which is the national average.

5
Future Worth Analysis

• For both cases we looked at the Future Worth as
• The Future value of the house
• Less how much will still be owed on the
  principal
  
• Less our total out of pocket expense (sum of
  monthly payments)
  

6
Fixed Interest Rate Flow

• A500,000(A/P, 6.75/12, 360)
• A 3,242.99
• ...
• At 10 years
  
  
• House value 674,676.77 (w/ 3 appreciation)
• Paid 315,663.85 in interest
• Still owe 427,344.17 on the principal
• Paid a total of 388,319.68
• Profit -140,987.08

7
Variable Interest Rate Flow

• A 3,143.92 for the life of the loan assuming
  the variable stays at 6.45
  
• 
  . . .
  
• At 10 years
• House value 674,676.77
• Paid 300,617.66 in interest
• Still owe 424,211.42 on principal
• Paid a total of 376,406.24
• Net Profit -125,940.89

8
Sensitivity Analysis
Intercepting at 6.765
Therefore, a variable rate loan that averages
6.765 over the next 9 years would be equal to a
fixed rate 6.75 loan, therefore it is probably
safer to go with the fixed loan from the
beginning.
9
More Sensitivity Analysis

• Analysis for the fixed loan on of years

15 years turning point
27 years lived there for free
10
A Little More Sensitivity Analysis

• We Also performed Sensitivity Analysis on the
• inflation rates of the fixed and variable
  loans.- As inflation went up, we saw quicker
  profit. (trough moved to the left)
  
• - As inflation went down, took longer to see
  profit. (trough moved to the right

11
Conclusion

• Because of the nature of our project
• there is no definite answer only suggestions
• If in rising market Fixed rateIf in declining
  market Variable
  
• If more than 10 years Fixedbecause in past 20
  years rates went up to 20
  
• If short term, and can get much lower rate than
  fixed - Variable
  

12
Resources

• BankOfAmerica.com
• QuotingLoans.com
• LendingTree.com