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Author: timk777 One star, 50 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 126967  
Subject: Number Crunching Date: 2/26/2013 6:33 PM
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I hope this is the "right" board to ask this question. I'm trying to determine how long a 3-year ARM will beat a 5-year ARM if the rate changes 1% after 3 years.

Loan A: $3MM -- 20 yr. amortization -- 3.2% first 3 years -- then resets for another 3 years, etc. until maturity. (Reset = prime + 0.35%)

Let's say, after 3 years, the rate moves to 4.2%.

Loan B: $3MM -- 20 yr. amortization -- 3.6% first 5 years -- then resets for another 5 years, etc. until maturity. (Reset = prime + 0.55%)

Let's say, after 5 years, the rate moves to 4.6%.

Then, after year 6 on Loan A, the rate also moves to 4.6%.

Which loan is better for the first six years? Hoping to repay or refinance after six years.

Thanks in advance for your help,
Tim
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Author: foo1bar Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 124849 of 126967
Subject: Re: Number Crunching Date: 2/26/2013 6:55 PM
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3.6% first 5 years -- then resets for another 5 years, etc.
You mean is 3.6% for first 5 years.
Then the next 5 is 4.6%?

Most loans I've seen (which admitedly isn't a lot) are 5-1 or 3-1 ARMs.
So after the first 5 years it annually changes the rate.
If the rates were slowly going up (say prime goes up 0.3% each year) it'd look something like this for each year:
3.6%
3.6%
3.6%
3.6%
3.6%
5.1%
5.4%
5.7%
6.0%
6.3%
etc.

Which loan is better for the first six years?
Get out a spreadsheet and do 72 rows (one for each month) and plug in your assumptions about what interest rates will do.
I'd do a couple different scenarios - including absolute-worst-case-rate-increase-that-maxes-out-the-rate-adjustment-limits
And a realistic-worst-case.

And if I were you, I'd look at both the interest paid, and cashflow (monthly payment)

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 124850 of 126967
Subject: Re: Number Crunching Date: 2/26/2013 7:09 PM
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Hi Tim,

Here's a pre-coded Excel calc you can use;
https://dl.dropbox.com/u/8644020/Loan%20Calculator%20w-Extra...

Question;
In the U.S. virtually all hybrid ARM loans (those fixed for a while than becoming adjustable) are built on a 30 year chassis.
Further, there are no current lenders offering 1st lien hybrid ARMs tied to Prime... they're all generally tied to LIBOR or the Treasuries.
Lastly, margins are generally the same for 3 & 5 year versions, and usually around 2.25% (when tied to the 1 year LIBOR.)

Are you in a different country, or what lender are you looking at?

Dave Donhoff
Leverage Planner

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Author: crackdclaw Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 124851 of 126967
Subject: Re: Number Crunching Date: 2/26/2013 9:09 PM
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It looks like commercial financing vs residential.

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Author: CCinOC Big gold star, 5000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 124852 of 126967
Subject: Re: Number Crunching Date: 2/26/2013 10:02 PM
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Try this site to see if there are any calculators that fit your need for analysis.

http://mtgprofessor.com/calculators.htm

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Author: timk777 One star, 50 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 124853 of 126967
Subject: Re: Number Crunching Date: 2/26/2013 10:42 PM
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Dave,

I guess I should have mentioned, yes, it is a commercial loan. And each would reset every 3,6,9 years or every 5, 10, 15 years. It's a 10-year balloon with a 20-year amort.

Thanks for the spreadsheet. I'll look that over to see if it helps me.

Generally, I would think the 3-year would perform better than the 5-year on average. You?

Thanks,

Tim

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 124854 of 126967
Subject: Re: Number Crunching Date: 2/27/2013 12:03 AM
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Hi Tim,
You are welcome!

Generally, I would think the 3-year would perform better than the 5-year on average. You?
It would depend on;
1) how much the discount is on the shorter term costs,
2) how long the overall leverage will be desired,
3) how you employ your cashflows from the lowered terms,
4) what the future holds in rate market risks,
5) whether a rising rate market generates a greater return on your saved dollars than the greater cost on your leveraged dollars.

Regarding #4, I think that today's Fed yammering morethan confirms what my technical analysis has been suggesting for 8+ years now; We are in for a very long time going forward of seriously suppressed interest rates (aka "ZIRP"... Zero Interest Rate Policy.)

#5 generally negates risks of #4 anyway, and often turns it into a golden consequence.

Luck!
Dave Donhoff
Leverage Planner

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