Average Amount Of Formula For A 2 Month Old The ARM Sales Pitch

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The ARM Sales Pitch

My eyes have been on many economic articles over the past few years. There is no shortage of opinion that explains the main economic driver preventing the United States from a long period of recession, if not the depression, is the ability of homeowners to remove capital from their homes, and spend it on consumer goods.

I’m not going to get into a debate about whether or not this opinion is valid. What I would like to discuss is how such a transaction (refinance loan, and more specifically the Fixed Rate Re-fi) is thrown at the homeowner. Just for the reader’s information, my expertise in this area is based on closing over 750 of these transactions over the past 4 years, most of which involved Adjustable Rate Mortgages (ARM’s).

An ARM pays principal and a fixed interest rate only over a period of years, usually two to five. After the initial period, the interest rate fluctuates with the current rate. The selling point of this type of loan is the lower interest rate than a 30-year fixed rate loan. In some cases, the payment can be several hundred dollars per month for the lowest price. Of course, the borrower is concerned that rates are going up and is wondering if this is a good idea. The mortgage broker “solves” this issue as he explains to his client, “in six months, your credit will be better, and we can lock in a lower fixed rate at that time.”

I have seen many instances where this expression has worked with small borrowers. I decided that for this article, I’m going to break it down into dollars and cents because I believe – numbers don’t lie.

I ran the numbers using current rates as found on bankrate.com. I’m not entirely sure you can get a 6.15% APR for a 30-year fixed mortgage, but since this is just an example, let’s pretend, OK?

Now the first 24 months (2 years) of the 30 year fixed term pay (per month) as follows:

$200,000 @ 6.15%

Interest Payment Principal Balance

9/2/2006 1,218.46 1,025.00 193.46 199,806.54

10/ 2/2006 1,218.46 1,024.01 194.45 199,612.10

11/ 2/2006 1,218.46 1,023.01 195.44 199,416.65

12/ 2/2006 1,218.46 1,022.01 196.45 199,220.21

1/2/2007 1,218.46 1,021.00 197.45 199,022.75

2/2/2007 1,218.46 1,019.99 198.46 198,824.29

3/2/2007 1,218.46 1,018.97 199.48 198,624.81

4/2/2007 1,218.46 1,017.95 200.50 198,424.30

5/2/2007 1,218.46 1,016.92 201.53 198,222.77

6/2/2007 1,218.46 1,015.89 202.56 198,020.21

7/2/2007 1,218.46 1,014.85 203.60 197,816.60

8/ 2/2007 1,218.46 1,013.81 204.65 197,611.96

9/ 2/2007 1,218.46 1,012.76 205.70 197,406.26

10/ 2/2007 1,218.46 1,011.71 206.75 197,199.51

11/ 2/2007 1,218.46 1,010.65 207.81 196,991.70

12/ 2/2007 1,218.46 1,009.58 208.87 196,782.83

1/ 2/2008 1,218.46 1,008.51 209.94 196,572.89

2/2/2008 1,218.46 1,007.44 211.02 196,361.87

3/2/2008 1,218.46 1,006.35 212.10 196,149.76

4/ 2/2008 1,218.46 1,005.27 213.19 195,936.57

5/2/2008 1,218.46 1,004.17 214.28 195,722.29

6/2/2008 1,218.46 1,003.08 215.38 195,506.91

7/2/2008 1,218.46 1,001.97 216.48 195,290.43

8/2/2008 1,218.46 1,000.86 217.59 195,072.84

And the 5-year ARM pays for the first 24 months as:

$200,000 @ 5.82%

Interest Payment Principal Balance

9/2/2006 1,176.05 970.00 206.05 199,793.95

10/2/2006 1,176.05 969.00 207.05 199,586.89

11/2/2006 1,176.05 968.00 208.06 199,378.83

12/2/2006 1,176.05 966.99 209.07 199,169.77

1/2/2007 1,176.05 965.97 210.08 198,959.69

2/2/2007 1,176.05 964.95 211.10 198,748.58

3/2/2007 1,176.05 963.93 212.12 198,536.46

4/2/2007 1,176.05 962.90 213.15 198,323.31

5/2/2007 1,176.05 961.87 214.19 198,109.12

6/2/2007 1,176.05 960.83 215.23 197,893.90

7/2/2007 1,176.05 959.79 216.27 197,677.63

8/2/2007 1,176.05 958.74 217.32 197,460.31

9/2/2007 1,176.05 957.68 218.37 197,241.94

10/2/2007 1,176.05 956.62 219.43 197,022.51

11/2/2007 1,176.05 955.56 220.50 196,802.01

12/2/2007 1,176.05 954.49 221.56 196,580.45

1/2/2008 1,176.05 953.42 222.64 196,357.81

2/2/2008 1,176.05 952.34 223.72 196,134.09

3/2/2008 1,176.05 951.25 224.80 195,909.28

4/2/2008 1,176.05 950.16 225.89 195,683.39

5/2/2008 1,176.05 949.06 226.99 195,456.40

6/2/2008 1,176.05 947.96 228.09 195,228.31

7/2/2008 1,176.05 946.86 229.20 194,999.11

8/2/2008 1,176.05 945.75 230.31 194,768.80

There you have it – two amortizations in 24 months. Remember, the selling price means that the borrower will fix their credit in two years (sometimes as fast as 6 months) during which time they can lock in a fixed low rate for 30 years.

It looks like the borrower keeps the difference in the monthly payment ($1,218.46 – $1,176.05 = $42.41) multiplied by 2 years or 24 months (24 * $42.41 = $1,017.84). Keep in mind that the rate difference is 33 points or 1/3 percent. For some transactions, such as small borrowers, the difference can be as much as 3/4 percent. For the purposes of our illustration, the borrower gets a monthly down payment of about $43 which equates to a savings of just over a thousand dollars over two years. The question then comes to mind, is it worth it? To find this out, let’s continue the analysis.

Predicting Rate

Predicting future interest rates is very difficult. I don’t think I’ll find much to disagree with that statement. Considering the current situation and historical averages, however, we can probably predict slightly higher rates in the next two years. If so, how can a borrower be sure that his payment will go down when his credit score improves? Sure, his score may qualify him for a lower rate, but how low, the lender is unsure. Can a 30% fixed rate mortgage be higher in two years than the adjustable rate at the closing date? It’s certainly possible, right? In my opinion, the borrower cannot be sure that his fixed income will be low in the future. The strategy, on its face, fails because it relies on predicting variables – interest rates and credit scores – that are not predictable in the future.

Closing costs are easily omitted

But if we dig deeper, we can clearly see the folly of this strategy. Below are the typical closing costs associated with a home equity loan. This list is by no means exhaustive but is provided only to give the reader an idea of ​​how much a loan can cost an unsuspecting borrower of a 200,000 mortgage loan.

* Application fee $450

* Loan Consolidation Fee 2% or $6,000

* Tax Service Fee $70

* $10 Flood Assurance Fee

* Closing fee $475

* Title Policy $1,100

* Recording fees $350

* Overnight and email $90

* Value of $300


If the borrower actually pays off his ARM in two years, he will have to pay these closing costs again. Almost none of these can be avoided unless you have a loan buddy. The cost outweighs the dollar for dollar savings in monthly payments more than 8 to 1. Remember, this calculation does not look at either the time value of money or the opportunity cost of interest paid.

Meanwhile, if you look again at the amortizations, you will see that none of the principal is paid after two years. (To find out more about this situation, read my article entitled, An interesting look, written a few weeks ago.) What this means is that the borrower has to start the process all over again, paying almost all the interest for the first several years and none of the principal. In fact, the borrower has been renting his house for two years – the bank as the landlord. After all, it’s the American way.

Yes, the mortgage bank would probably hate this review and would probably offer the following objection: An honest banker (trying not to laugh) will make sure that the product / loan fits the needs of the borrower. For example, a good loan officer will ask if the borrower plans to stay at home or if the borrower expects to move in a few years. If you stay put for 30 years, savings and “peace of mind” more than closing costs.

But this is a very bad “if”. And since the borrower has lost his crystal ball, he often nods and says he has nowhere to go. But the “honest” bank knows that most people go within 5 years and no one pays their loan in full.

The real problem is that people trust these banks to get them a good “rate” that the borrower thinks is the most important factor in the matter. The main problem is the loan amount. The rate is just a smoke screen banks use to separate their customers from their money, time and time again. I see closing costs in excess of $10,000 on these deals time and time again. But the borrower almost never asks about them. All he cares about is rate and pay. If the number fits into his budget, he signs the papers. It’s that simple. Just looking at how much it costs removes the fog – but very few bother to do so.

I think real estate prices will always go up and costs are something you have to pay to play in the real estate market. Basically, the homeowner takes a position in the free market asset just like a trader takes a position in the futures or equity markets. But real estate is often the most leveraged asset in the illegal market. These two characteristics of the housing market pose significant risks to owners of this asset class.

Of course, they are probably right. Maybe this time WAS different.

Thank you for listening.

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