Five loans are being compared in this report. All of the loans are of an equal amount - $200,000 - although it is not required by the program that the loans all be of the same amount. The top of the report prints out the general terms of each loan. Of the five loans two of them are 15 year loans and three are 30 year loans. They range in interest rates from a low of 6.75% to a high of 7.25%. Each loan has a different payment amount and differing closing costs and points charged.
The reports generated by the analysis contain the calculated present values of the costs and benefits of each of the loans analyzed. The "lowest cost" loan is highlighted and printed in boldface type.
The numbers are negative because we are comparing "costs". Negative numbers represent outflows of money. Compare the numbers in adjacent columns. The difference between the numbers in adjacent columns is the cost savings between the alternative loan choices.
Direct your attention to year #1. If you had opted for the lowest interest rate/shortest term loan and only held the loan for 1 year before selling or refinancing, loan #1 would have cost you $21,115.44. By contrast, loan #5 would have cost you $16,413.01. You would have paid over $4,700 more than necessary for your financing - if held only 1 year. This analysis uses a 4% discount rate and is done on a before-tax basis.
The estimated holding period of the loan is very important in making the correct decision. If, in this sample, you plan to keep the loan in place for 4 years, loan #4 becomes the best choice. It is better than the worst loan (Loan #1) by over $2,200. This figure is from the before-tax analysis.
If you plan to hold the loan 7 or more years, loan #1 now becomes your best choice. It is better than loan #5 by almost $3,900.
If you hold for 10 years loan #1 will save you almost $10,000 over your worst choice (Loan #5). By the end of 15 years a wrong choice could have cost you over $21,500 more than it needed to cost you.
You are urged to play "what-if"! Go back to the Discount & Tax Rate screen and enter additional/different discount rates and a tax bracket. See what impact these variables have on your loan choices. We ran a sample at 4% using a 28% tax bracket. Loan #5 was still better in year 1 but only by $3,400.
Next, we changed the discount rate to 8% while leaving the tax rate at 28%. At 8% the differences were less - but still appreciable. Differences between the best and worst:
| |
Before-Tax |
After-Tax |
| 5 yrs. |
$2,900 |
$3,150+ |
| 10 yrs. |
$3,100 |
$6,000+ |
| 15 yrs. |
$3,850 |
$11,275+ |
|
We urge you to play with and get comfortable with these analyses. THEY CAN SAVE YOU A GREAT DEAL OF MONEY.
You may view the loan comparison input screens to see how much information can be entered. Read the help screens to learn what some of the input items are. There is no charge to play with the input screens and generate "amortization" schedules.
NOTE: The choice of which loan is the "lowest cost" loan may change from year to year and from report to report. Each report can contain results that are based on different discount rates. Three of the reports contain an "after-tax" analysis of the loans. If a tax bracket was entered by the user, these reports may reflect significantly different results than the "before-tax" analyses.
Results may differ because of differences in:
- Closing costs and points
- Interest rates
- Amortization term
- Speed of principal pay off (Equity build up)
- Loan amount sizes
- Discount rates
- Amount of closing costs included in the loan amount
- Mortgage insurance requirements
The calculations and resulting reports take all of the foregoing variables into account
If numbers in a column start repeating and do not change, this indicates the loan is paid off and no additional dollars of outlay are required. The numbers are repeated only to make comparisons with adjacent columns easier.
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