Calculated Industries 3442 - Manual (Page 66)

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PICK-A-PAYMENT AND COMBO LOANS
The following examples show you how to calculate P-A-P/EB P-A-P
or Combo (1st/2nd Trust Deed) loans, in order to demonstrate the
savings benefits to your clients. These loans can result in significant
savings over traditional fixed-rate loans (with or without MI), during
the first five years.
P-A-P loans start out with an extremely low, below-market interest
rate, typically for 1, 3, 12, or 36 months, or a Zero-month P-A-P*, a
popular option, where there is no waiting period. After this Start peri-
od, the rate adjusts to the fully indexed rate. The Start # of Months
specifies how many months the payments will be applied to principal
& interest, or fully amortized, at the low Start rate. Once the Start
Period is over, the loan reverts to the Note rate and payments are
no longer fully amortized, or the payments are only applied to inter-
est (otherwise known as negative amortization).
*With the Zero-month P-A-P, interest starts compounding at the full Note rate immedi-
ately (there is no waiting period) and the loan immediately accrues deferred interest.
However, the initial payment is still much lower than a fixed-rate loan, and therefore
this loan also results in notable Investment Savings.
In a P-A-P, the payments during the initial years can be extremely
low. The payment increase is limited to the designated Payment Cap
percentage limit over the selected Recast Period. After the Recast
Period, the loan is recalculated based on the remaining balance,
Note%, and remaining P-A-P term.
With a P-A-P, the Start Period is like having a fixed loan at a very
low rate because the payments during this period are fully amor-
tized. This type of loan results in significant savings in monthly pay-
ments over a regular fixed loan during the first five years** of the
loan. One can compare various investment scenarios by entering a
desired ROI% (e.g., a 7% or 10% rate of return).
**While it is most common to find the P-A-P/EB P-A-P savings for the first five years,
the calculator also allows you to find the savings for less than five years. For exam-
ple, to find savings for the first three years, enter
3 ∏ or 3 e and continue
with the regular P-A-P/EB P-A-P calculations.
The calculator also includes Recast Preference Settings for P-A-P
loans, which allow you to select the Recast Period (1-15 years) for
each type of P-A-P (for 0, 1, 3, 12, or other Start Months, e.g., a
5-month Start). A 36 Start Month has a recast period range of 3-15
years. These modifications allow greater flexibility of how the cash
flows are calculated by allowing the user to select the recasting peri-
od for a specific loan, as well as reducing the keystroke sequence
for calculating a P-A-P loan based upon a specified payment.
(Cont’d)