Texas Instruments BA Real Estate - Comparing an ARM to a Fixed-Rate Mortgage

36 Mortgages and Amortization
BEAR-CH1.DOC BA Real Estate Guidebook Jackie Quiram Revised: 09/28/99 1:16 PM Printed: 09/28/99 1:16 PM
Page 36 of 36
You are trying to help a buyer decide whether to use a
fixed-rate mortgage or an adjustable-rate mortgage. You
want to compare the fixed-rate term to the best one-year
adjustable loan you have found. Using the figures given
above and assuming a maximum adjustment at each
period, at what point would the savings from the
adjustable-rate mortgage become exhausted?
Before performing this comparison, complete the
Adjustable Rate Mortgage
worksheet to obtain the ARM
monthly payments for each adjustment period.
Adjustment Period Rate Payment
Initial 5.00% $778.39
Second 7.00% $960.21
Third 9.00% $1,153.34
Fourth (maximum) 11.00% $1,354.86
Steps Keystrokes Display
Clear TVM values.
#
-
0.00
Enter term.
30
0
TRM= 30.00
Enter fixed-rate interest.
7.5
1
I% = 7.50
Enter amount of loan.
145
q
2
LN = 145,000.00
Compute amount of
fixed-rate payment.
$
3
PMT=
-
1,013.86
Calculate monthly
savings/costs by
subtracting amount of
initial ARM payment
from fixed-rate payment.
t
X
778.39
j
235.47
Multiply monthly
savings/costs by number
of months in this ARM
period and store.
O
12
j T g
MEM= 2,825.65
Comparing an ARM to a Fixed-Rate Mortgage
For a loan of $145,000, you are comparing a fixed-rate
mortgage of 7.5% for 30 years to a 30-year ARM. The
ARM has an initial rate of 5% with a 2% maximum
adjustment for each 12-month period and a maximum
lifetime adjustment of 6%. Find the breakeven point.
Situation
Solution