The LOAN Procedure

Analyzing Buydown Rate Loans

A 15-year buydown rate loan is another alternative to finance the $100,000 investment. The nominal annual interest rate is 6.5% initially and will increase to 8% and 9% as of the 24th and 48th payment periods, respectively. The nominal annual interest rate is lower than that of the fixed rate alternative, at the cost of a 1% discount point ($1000) paid at the initialization of the loan. The following BUYDOWN statement represents this loan alternative:

proc loan start=1998:12;
   buydown amount=100000 rate=6.5 life=180
           buydownrates=(24=8 48=9) pointpct=1
           label='BANK4, Buydown';

List of Rates and Payments for Buydown Rate Loans

Figure 17.4 shows the list of rates and payments in the loan summary table. It reflects the two rate adjustments and the corresponding monthly payments as well as the initial values for these parameters. As of December 2000, the periodic payment of the buydown loan exceeds the periodic payment for any of the other alternatives.

Figure 17.4: List of Rates and Payments for a Buydown Rate Loan

The LOAN Procedure

Rates and Payments for BANK4, Buydown
Date Nominal Rate Effective Rate Payment
DEC1998 6.5000% 6.6972% 871.11
DEC2000 8.0000% 8.3000% 946.50
DEC2002 9.0000% 9.3807% 992.01