Loan Options Which loan is best for you

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

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.

Some Loan Background Fixed vs. Variable Fixed Rate Mortgage (FRM) • Constant interest rate throughout the life of the loan, which produces constant payments Adjustable Rate Mortgage (1 ARM) • First year fixed interest rate • Rates change monthly after fixed period • Payment amount is not fixed.

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.

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)

Fixed Interest Rate Flow • A=$500, 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

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

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.

More Sensitivity Analysis for the fixed loan on # of years 15 years = turning point 27 years = lived there for free

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

Conclusion Because of the nature of our project there is no definite answer only suggestions: 1. If in rising market – Fixed rate If in declining market – Variable 2. If more than 10 years – Fixed because in past 20 years rates went up to 20% 3. If short term, and can get much lower rate than fixed - Variable

Resources • Bank. Of. America. com • Quoting. Loans. com • Lending. Tree. com