Analyzing Adjustable Rate Loans |

In addition to specifying the basic loan parameters, you need to specify the terms of the rate adjustments for an adjustable rate loan. There are many ways of stating the rate adjustment terms, and PROC LOAN facilitates all of them. For details, see the section Rate Adjustment Terms Options.

Assume that you have an alternative to finance the $100,000 investment with a 15-year adjustable rate loan with an initial annual nominal interest rate of 5.5%. The rate adjustment terms specify a 0.5% annual cap, a 2.5% life cap, and a rate adjustment every 12 months. *Annual cap* refers to the maximum increase in interest rate per adjustment period, and *life cap* refers to the maximum increase over the life of the loan. The following ARM statement specifies this adjustable rate loan by assuming the interest rate adjustments will always increase by the maximum allowed by the terms of the loan. These assumptions are specified by the WORSTCASE and CAPS= options, as shown in the following statements:

proc loan start=1998:12; arm amount=100000 rate=5.5 life=180 worstcase caps=(0.5, 2.5) label='BANK3, Adjustable Rate'; run;

The list of rates and payments in the loan summary table for the adjustable rate loans reflects the changes in the interest rates and payments and the dates these changes become effective. For the adjustable rate loan described previously, Figure 17.3 shows the list of rates and payments that indicate five annual rate adjustments in addition to the initial rate and payment.

The LOAN Procedure

Rates and Payments for BANK3, Adjustable Rate | |||
---|---|---|---|

Date | Nominal Rate | Effective Rate | Payment |

DEC1998 | 5.5000% | 5.6408% | 817.08 |

JAN2000 | 6.0000% | 6.1678% | 842.33 |

JAN2001 | 6.5000% | 6.6972% | 866.44 |

JAN2002 | 7.0000% | 7.2290% | 889.32 |

JAN2003 | 7.5000% | 7.7633% | 910.88 |

JAN2004 | 8.0000% | 8.3000% | 931.03 |

Notice that the periodic payment of the adjustable rate loan as of January 2004 ($931.03) exceeds that of the fixed rate loan ($927.01).