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Posted by mbalalaykin on August 15, 2007, 6:23 am
Assuming that interest rates will remain the same as they are today
(too simplistic), the following calculator computes mortgage payments
before and after reset.
http://csharpcomputing.com/webapps/arm.jsp
For example, if today loan amount 450000, interest rate 4.125%, loan
is 5/1 ARM, and it is due to reset next year, then monthly payment
before reset is $2354 and after reset is $3247
Hope this helps,
Martin
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Posted by Foobar on August 15, 2007, 4:02 pm
> Assuming that interest rates will remain the same as they are today
> (too simplistic), the following calculator computesmortgagepayments
> before and after reset.http://csharpcomputing.com/webapps/arm.jsp
>
> For example, if today loan amount 450000, interest rate 4.125%, loan
> is 5/1ARM, and it is due to reset next year, then monthly payment
> before reset is $2354 and after reset is $3247
>
> Hope this helps,
> Martin
Damn. Had I only taken the fixed at 6%. My payment would be ~2720
per month. The savings is a car payment. I hope you saved that
extra 354 per month, because, those of us who took a fixed mortgage,
aren't going to help you.
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Posted by joeu2004 on August 15, 2007, 11:09 pm
> the following calculator computes mortgage payments
> before and after reset.
> http://csharpcomputing.com/webapps/arm.jsp
I will put aside my suspicions about the OP's motives for pointing to
this particular calculator. At the very least, this posting provides
an opportunity to make some observations about ARM calculators in
general. IMHO, anyone who is seriously interested in an ARM
calculator would be wise to do a Google search.
> For example, if today loan amount 450000, interest rate 4.125%,
> loan is 5/1 ARM, and it is due to reset next year, then monthly
> payment before reset is $2354 and after reset is $3247
Yes, those are the results if you enter a maturity term of 30 years
and a loan age of 4 years. But I question whether the calculator is
working correctly.
The fixed-term and variable-term payments (2354 and 3247) seem to be
computed as if "loan amount" (450,000) is the __outstanding__
__balance__ after 4 years (loan age) of a 30-year 5/1 ARM loan; ergo,
the original loan amount was 485,658.
If that's how the OP understands "loan amount" in his usage of the
calculator, everything is copacetic.
That is not how I would interpret "loan amount" in the context of the
other terms used by the calculator and the OP. I would think that
refers to the __original__ loan amount 4 years ago. If that was
450,000, I would expect the fixed-term payment to be 2181 and the
variable-term payment to be 3009, based on the same assumption about
the variable-term interest rate that the calculator seems to make (see
below).
In either case, what makes the OP think that the variable-term payment
is relevant to his loan?
It appears that this ARM calculator assumes that the variable-term
interest rate is about 7.48% -- at least today, Aug 15. We would have
to wait until tomorrow, next week or next month to see if that rate
changes or if it is merely a constant in the calculator. (I am ass-u-
me-ing that the javascript code for the calculator is not open-
source.)
Of course, the variable interest rate of ARMs can be based on any
number of indexes. Moreover, the spread (margin) and any caps depend
on the lender's policies and requirements. So I don't think we can
expect the ARM calculator recommended by the OP to be representative
of all ARM loans.
If this is an existing loan, as the OP implies by a loan age of 4
years, the OP should look at the terms of his loan for those
parameters. Then ARMed ;-) with the proper parameters, the OP would
be well-advised to search for a more fully-functional online ARM
calculator, which permits the user to control those parameters.
Nevertheless, this exposes the biggest flaw in the OP's assumption
that any ARM calculator "computes mortgage payments before and after
reset". Since no one can predict the future behavior the ARM index,
no one can really predict the (initial) interest rate for the variable
term. (Unless, of course, the loan agreement guarantees an initial
variable-term rate. I've never heard of that, though.)
IMHO, a "proper" design for an ARM calculator would use Monte Carlo
simulation to estimate the varying interest rates over the full
variable term, based on historical behavior. Even that creates a
misleading illusion of accuracy. But when properly explained in
statistical terms, I think it prepares the borrower better for what
might lie ahead.
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Posted by mbalalaykin on August 16, 2007, 5:53 pm
>
> Yes, those are the results if you enter a maturity term of 30 years
> and a loan age of 4 years. But I question whether the calculator is
> working correctly.
>
Yes it does.
You could compare calculator at
http://csharpcomputing.com/webapps/arm.jsp
with the one on
http://www.countrywide.com/calculators/calculator.aspx?CalcType=Amortization
Of cause, this one is more complicated to use because it is only for
FRM, but you can play with it.
You can also compare with Bloomberg tools of you have a subscription.
> The fixed-term and variable-term payments (2354 and 3247) seem to be
> computed as if "loan amount" (450,000) is the __outstanding__
> __balance__ after 4 years (loan age) of a 30-year 5/1ARMloan; ergo,
> the original loan amount was 485,658.
Yes, "Loan Amount" is *current* loan balance, not the original loan
amount.
>
> In either case, what makes the OP think that the variable-termpayment
> is relevant to his loan?
Well, the assumption is ARM index is 1 year LIBOR (which is majority
of Hybrid ARM loans), and loan margin is 2.25% (which is default for
LIBOR indexed prime loans).
Obviously, you do not know what interest rate will be at the time of
reset.
But if you make a very simple (and simplistic) assumption that
interest rates will remain unchanged, i.e. they will be exactly as
they are today, then the calculator gives you an answer.
It is just a tool, not a garantee on a future monthly payment.
If you know, a better ARM calculator please post a link.
Best,
Martin
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Posted by joeu2004 on August 16, 2007, 7:39 pm
> Well, the assumption is ARM index is 1 year LIBOR (which is majority
> of Hybrid ARM loans), and loan margin is 2.25% (which is default for
> LIBOR indexed prime loans).
Thanks for that explanation. I am curious: where you did find that
explanation. I looked "high and low" for a link that would explain
it, to no avail.
> Obviously, you do not know what interest rate will be at the time
> of reset.
> But if you make a very simple (and simplistic) assumption that
> interest rates will remain unchanged, i.e. they will be exactly as
> they are today, then the calculator gives you an answer.
Yes, and that is the (necessary) assumption that all ARM calculators
make -- at least all of them that I have used.
My point was: since I saw no way to change the interest-related
assumptions (index rate and margin) and since I saw no explanation of
the calculator's assumptions (at the very least), anyone's reliance on
the calculator to "computes mortgage payments before and after
reset" (your words) would be misplaced, IMHO.
If you had said "it gives you 'some idea' of the payment after the
fixed period", I might have let it go, especially if you had
elaborated on the interest-related assumptions, as you explained
above. (Thanks again.)
> It is just a tool, not a garantee on a future monthly payment.
I think that goes without saying. But I know many people who might
not realize that, so perhaps it should be said.
> If you know, a better ARM calculator please post a link.
Just about any of the first ones that Google finds with a search key
of "ARM calculator" (without quotes). The important thing is: we
should be able to input the index (or initial variable rate) and the
margin. Most calculators expect rate; some provide a menu of indexes.
But stay away of any calculator that requires that your "register" in
order to use it. There are plenty of good ones that don't.
Another unstated caveat, which might be obvious: the user should pay
attention to the "jurisdiction" of the loan calculator. Most of the
ones I find in Google are tailored for US loans (and similar ones).
I don't know if Google tailors its search to the country of origin
(which it can try to infer from the IP address). But Canadians need a
very different calculator (just add Canada to the seach key). And I
believe that Brits might need a different calculator sometimes(!). I
have found two different methods for computing payments in use in the
UK. I don't know which is prevalent, or if one is simply wrong.
Anyway, I'm probably beating a dead horse. I think you and I see eye-
to-eye. I was just reacting to the over-simplification of your
posting and the calculator. I thought it was a good opportunity to
raise the awareness of some relevant issues for the casual lurker.
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