How to Structure Balloon Loans in eZMath and ZMath

by Michael Shohoney March 12, 2009 09:37

In a previous post, I discussed the different types of balloon loans.  It is time to show you how to apply that in our loan calculation software.  While going through this tutorial, please refer fo the screen shot below.

First, select the loan type you need to work with as we offer the ability to calculate a balloon in virtually every loan type we offer.  For our discussion, I will be working with a level payment (i.e. fixed rate) loan.  Once you've selected the loan type and are in the base terms screen, select Options and Variations and make sure that the radio button Yes is selected under the Balloon heading.  Then click on OK.  When you return to the Base Terms screen, the Balloon Terms pane should be displayed.  Now, let's look at how we would structure each of the balloon types discussed in the previous blog post.

The first balloon that I discussed is where the borrower would like to pay a certain amount and pay any leftover principal balance with the final payment.  To structure this type of balloon, enter the Interest Rate, the Periods/Year, the Term, the Loan Amount, the Payment Amount, the Advance Date and the Date of 1st Pmt.  Then click on Calculate.  You will be taken to the Output screen.  Note that the entered payment is made for one period less than the entered term.  The final payment is the remaining principal balance plus the final accrued interest.  Please take care to note if your entered payment amount caused negative amortization.  That is, was the entered payment amount enough to reduce the principal balance.  If not, you may want to make an adjustment to prevent that problem.

The second balloon that I discussed is where the borrower chooses an amount to remain unamortized.  To structure this type of balloon, enter the Interest Rate, the Periods/Year, the Term, the Loan Amount, the Advance Date, the Date of 1st Pmt and the Balloon Amount.  Then click on Calculate.  You will be taken to the Output screen.  Note that the entered balloon amount plus the calculated payment constitutes the final payment.  The calculated payment is made for one period less than the entered term.

 The third and final balloon I discussed was the prepay balloon.  To structure this type of balloon, enter the Interest Rate, the Periods/Year, the Term (this is the number of periods the regular payment amount is based on or what we term the Amortization Term), the Loan Amount, the Advance Date, the Date of 1st Pmt and the Actual Term (this is the actual term of the loan).  Then click on Calculate.  You will be taken to the Output screen.  Note that both the payment amount and balloon have been calculated.  The payment amount is the payment that would be calculated on a loan that had the number of payments entered in Term.  The balance remaining is then calculated at the end of the number of payments entered in Actual Term.  This balance remaining is added to the regular payment amount to come up with the final (balloon) payment.

 If you follow the steps above, you should be able to successfully structure balloon notes for virtually any of the loan types we offer in our loan calculation software packages, eZMath and ZMath.  As always, if you have any troubles with these calculations, feel free to contact us.


Output

by Michael Shohoney March 5, 2009 10:16

Okay, you've chosen a loan type, you've entered the data and you've hit the Calculate button, now what?  Well, if all went as planned, you are taken to the output screen.  What output is shown depends upon what output you were last on.  In other words, if you had the Truth in Lending Statement up with your last calculation, you are taken to the same output with the current calculation.  If you were on the Amortization Schedule output with your last calculation, you are taken the Amortization Schedule output with the current calculation, and so on.  If you would like different output for the current calculation, select what you would like from the drop down menu at the top left of the screen next to the label "Output type:".  The choices for output are:  Truth in Lending Disclosure Statement, Amortization Schedule, Documentation, XML Output and Principal vs. Interest Chart.  Once you make a selection, click on the "Request Output" button.  If you have selected Amortization Schedule and you want the entire schedule, check the "Entire Schedule" box and click Request Output.  Note that you can customize the Amortization Schedule output by clicking on the Customize button.  There are many choices for customization available to you.

As you can see, we offer many output options in eZMath and ZMath.  Your experimentation and creativity are the only limits to the possibilities.


Basic Loan Information Entries

by Michael Shohoney February 16, 2009 07:18

Note:  For the purposes of the following blog entry, we are assuming that Level Payment Loan was the Loan Type selected.

Okay, we've set the defaults and selected what we need from options and variations and have returned to the loan entry screen.  What do we need to enter and in what form should it be entered in order to get  the results we expect?  First of all, you will notice that you are in the Base Terms pane.  Within that pane there are entries for Interest Rate, Periods/Year, Term, Loan Amount, Payment Amount, Prepaids, Advance (note) Date, Date of 1st Pmt and Maturity Date.  We will go through these entries one by one.  In the interest rate field, enter the interest rate.  Enter it as a whole number or as you say it (i.e. 8.5 not 0.085) not as a decimal.  Then hit <tab> to go to the next entry.  In Periods/Year enter the number of payments made per year.  For monthly payments, enter 12.  In the Term field enter the total number of payments made.  If this is a 5 year, monthly payment loan, enter 60.  In the Loan Amount field, enter the total dollar amount of the loan (prior to any financed insurance premium).  You will notice that the software skips over the Payment Amount field.  That is because the software will calculate the payment amount.  If you had Balloon selected, you may make an entry here.  We will discuss that in a future post.  In the Prepaids field, enter the total amount of prepaid fianance charges that are not calculated by the software.  The software, depending upon your choices in Options and Variations, will calculate prepaid interest, buydown amounts and mortgage insurance premiums and add them to this entered amount to come up with the total prepaid fianance charges.  In the Advance Date, enter the funding date, closing date or the date when interest begins to accrue on the loan.  Enter the date in the format, MM/DD/CCYY.  In the Date of 1st Pmt, enter the date that the first payment is due.  Unless you have an irregular final payment date, you do not need to put anything in the Maturity Date field.  Once all of your entries are filled, click on the Calculate button and you will be taken to the results screen.  We will cover the results screen in our next posting.

As always, if you have questions or problems operating the software, contact us for help.


Options and Variations

by Michael Shohoney January 26, 2009 09:37

Okay, you've set your defaults and you've selected your loan type.  Now what?  Well, unless everything is set exactly the way you want it and you know that for sure, we suggest that you look at the Options and Variations screen.  You can do this one of two ways.  First, if you check the box at the bottom of the Loan Type screen and click Submit, you will be taken to the Options and Variations screen before you're taken to the entry screen.  If you do not check the box, you can access the Options and Variations screen by click on that tab from the data entry screen.

Once you're in the Options and Variations screen, you can choose to change a few of your defaults, if necessary, on a loan by loan basis.  Or, you can use this screen to add features to your loan.  Let's look at what defaults we can change first.

1.  Interest Type--You can change from simple to Add-on or discount, if applicable.  This is highly unlikely but is there in case you need it.

2.  Basis--You can change the accrual basis.  This is probably the most used of all of these.

3.  Odd Interest Adj--This would be the second most popular default change.

4.  Prepaid basis

 Now let's look at the loan features that we can change.  I will list all of them here.  Each loan type is set up to prohibit selection of any options that do not apply to that particular loan type.  So, if you do not see one listed in your screen, that means that that option is not available for your loan.

1.  Balloon--Select this if your loan has a balloon payment.

2.  Construction--Select this if your loan has a construction phase.  This can be construction only or construction permanent financing.  All calculations will be done as documented by Appendix D of Regulation Z.

3.  Insurance--Select the appropriate insurance type if your loan has insurance.  We offer standard credit life/accident and health (i.e. disability) insurance, private mortgage insurance, FHA MIP and VA insurances.

4.  Accelerated--Select this if your loan is going to be structured as an accelerated biweekly or weekly payment loan.  An accelerated biweekly (or weekly) loan is a loan where the standard monthly payment is divided by two (or four for weekly) and the resulting payment is collected every two (or four for weekly) weeks.  A new term is calculated based on the new payment amount.

5.  Buydown--If your loan has an interest rate buydown feature, select this.

6.  Skipped Payments--If you loan has payments that are skipped each year, select this option.

7.  Differing Freq.--This is an highly unusual option but it allows the interest and principal of the loan to be paid on differing frequencies or on different dates.  This is usually used in commercial lending.  For example, interest may be due monthly but principal is due quarterly.

 Once you have selected the options and variations that apply to your loan (yes, you may choose more than one at a time), click on OK and you will be taken to the data entry screen.  If applicable, more panes (i.e. data entry areas) will be displayed to take the information for each of the options you've chosen.  In future postings I will discuss the data entry process and look at each of the options.


Setting Your Default Values in eZMath and ZMath

by Michael Shohoney December 23, 2008 05:18

Prior to making any calculations in our loan calculation software (eZMath and ZMath), it is very important that you take the time to properly set the defaults.  How do you do this?

On the loan type selection screen, select the Defaults tab.  A screen will be loaded that offers a number of choices.  You should set values for each of these and those values will be used on your calculations within eZMath and ZMath.  You can alter some of the choices in the Options and Variations screen on individual loans but what you choose as defaults here will be displayed as the default selection in that Options and Variations screen.  Below I list each of the default items, the options within each of those items and some suggested values that you may want to use.

1.  Interest Type--Your choices you have on this item are Simple, Add-On and Discount.  Simple interest is going to be used in virtually any loan you calculate and should be the default value you set in this item.  It is possible that if you are in commercial or consumer lending that you may encounter an Add-On interest rate in an installment loan.  If you do, you must set that default here as Add-On is not a changeable option within the Options and Variations screen.  Discount interest is only offered on single payment loans and can be changed in the Options and Variations screen.

2.  Basis--The choices you have on this item are 30/360, Actual/365, Actual/360, Actual/Actual, 30/365 and 30/Actual.  These are accrual bases for the calculation of interest.  One of these will apply to your institution's policy and/or your lending discipline (i.e. consumer, mortgage or commercial).  You should set the value to the accrual basis you use most in your day-to-day lending.  This option is changeable on the Options and Variations screen so if you have a loan that is a different basis than you normally use, you can easily change it for an individual calculation.  We will have a blog post regarding basis in the near future.

3.  Odd Interest Adj.--The choices you have on this item are Amortize, Prepaid--Borrower Paid, Prepaid--Non-Borrower Paid, Amortize--Adj. Final Payment, Irregular First Payment and Ignore.  What you are choosing here tells the loan calculation software what to do with the interest accrued during a long or short (i.e. irregular) first period.  That is, loans where the time between the advance date and the first payment date is not exactly one unit period.  This selection is changeable on the Options and Variations screen so you should set this to what you normally do while remembering that you can change it on a loan by loan basis.  We have a blog post regarding this selection in the near future.  For the time being I will tell you that if I was a mortgage lending, my default setting would be Prepaid--Borrower Paid.  If I was a consumer lender I would set it to Amortize.

 4.  Prepaid Basis--The choices you have on this item are 30/360, Actual/365, Actual/360, Actual/Actual, 30/365 and 30/Actual.  This is the basis that you use IF you've selected one of the prepaid choices on Odd Interest Adj.  What it allows you to do is accrue that prepaid interest on a basis that is the same or different than the accrual basis on the loan.  The necessity for this choice came along due to the standard practices used in the mortgage industry.  It is the general practice to have a 30/360 accrual basis on a mortgage while utilizing an Actual/365 accrual basis on the prepaid interest.  You should choose the value here that corresponds to the practices of your institution.  This item is changeable in the Options and Variations screen.

5.  Interest Rate Rounding on ARMs--The choices you have on this item are Round Up, Round Down, Round to the nearest 1/10, Round to the nearest 1/8, Round to the nearest 1/4, Round to the nearest 1/2 and No rounding.  This item sets the rounding used when adding the values of Index and Margin on loans that have an adjustable rate.  You should set this to the policy of your institution.  This item is NOT changeable in the Options and Variations screen.

6.  Rounding Method--The choices you have on this item are Nearest, Round Down and Round Up.  This sets the way you round the payment calculated by eZMath and ZMath.  You should set this based on the policy of your institution.  As a general rule, we see most lenders round their payments up.  The reason for this is that by rounding up you guarantee a final payment that is always less than the regular payment amount.  This tends to be psychologically better from the borrower's perspective.  This item is not changeable in the Options and Variations screen.

7.  US Rule Accrual--The choices you have on this item are Actuarial Accrual and US Rule Accrual.  You should set this default to the correct value for your state regulations regarding interest accrual.  There are a number of states that require the use of US Rule Accrual.  US Rule Accrual does not allow the capitalization of interest (i.e. accrual of interest on interest).  If you have questions regarding the status of your state and the setting you should use here, please confer with your compliance officer or legal counsel.  It should be noted that regardless of what you choose here, all APRs in eZMath and ZMath are calculated using the Actuarial method of calculation.

 In conclusion, what you set as your defaults on this screen can greatly influence the results you get using our loan calculation software.  By using some common sense, advice from the policy makers at your institution and paying attention to the practices and traditions within your lending discipline can help you effectively set these default values so that working with the software is easier and produces the results you seek.  As always, if you need any help with any of this content, please feel free to contact us.  We're more than happy to help you get things set properly.


How to Select Loan Type in ZMath and eZMath

by Michael Shohoney December 11, 2008 07:15

The purpose of the Calculators 101 area will be to provide tutorials and primers on how to use our software products.  The first installment will be a thorough definition of the loan types we offer in eZMath and ZMath and how to choose the correct loan type for your particular problem. ZMath­­® offers the following loan types: 

1.  Level Payment Loan--Fixed-rate, installment loan with or without a balloon payment.  Can have single or multiple payment streams.

2.  Single Payment Loan--Installment loan with one repayment of principal and accrued interest.

3.  Interest Only Loan--Installment loan with interest only payments until the final payment where all principal is paid with the final accrued interest.  Can have multiple payment streams.

4.  Plus Interest Loan--Installment loan where principal reduction payments are level and made on a regular basis along with payments of accrued interest.  The principal and interest payments may be combined or made separately or at different frequencies.  These are also known as constant payment to principal loans.  Can have multiple payment streams.

5.  Random Rate Loan--Installment loan where the interest rate changes over the life of the loan and the interest rate changes are not tied to an index nor follow rate caps, etc.  These are often referred to as renegotiable rate loans.

6.  Adjustable Rate Mortgage (ARM)--Installment loan where the interest rate is tied to an index and rate changes are limited by rate caps.

7.  Graduated Payment Mortgage (GPM)--Installment loan where the payment amount graduates by a percentage (or fixed dollar amount) during some time at the beginning of the loan.

8.  Graduated Payment, Adjustable Rate Mortgage (GPARM)--Installment loan that combines both a graduated payment feature along with an adjustable rate feature.

9.  Interest Only Period/Repayment (Level and ARM)--Installment loans that combine a period of interest only repayment along with a principal and interest repayment.  We offer both fixed rate and adjustable rate versions of this loan type.

10.  LIBOR/COFI Loan--A type of graduated payment, adjustable rate loan where the interest adjustments and the graduated payment adjustments occur at different times.

11.  Multiple Disbursements (Draw Notes)--Installment loans where there are multiple disbursements from the lender along with repayment by the borrower.  These are only used in the cases where the disbursement dates are known in advance.  Do not confuse these loan types with construction loans as defined by Regulation Z, Appendix D.  Only use this for construction loans if the amount and dates of all of the disbursements are known prior to closing.

12.  Quick APR--An APR (annual percentage rate) calculator that you can use to audit APR figures on loans where you already know the payment streams.

13.  Payment Option ARM--Adjustable rate mortgages where the borrower has the option to make a minimum payment rather than the full principal and interest payment.  We offer versions with and without an interest only repayment phase.

To select what loan type applies to your particular problem can be very easy or can be somewhat baffling.  Obviously, if you only have one payment, then single payment loan is the loan type you should choose.  Likewise, if you have a common fixed-rate, installment loan, level payment loan is the loan type you should choose.  But what if you have something that is more complex than that?  What clues can you use to help you choose the correct loan type?  Here are some tips: 

Does your loan have an interest rate change feature?  If so, is the interest rate change tied to an index?  Are the rate changes limited by rate caps?  If so, your loan has an adjustable rate feature. 

Are there other features on your loan?  Does the payment amount change based on a percentage or dollar amount?  If so, the loan has a graduated payment feature. 

Is there an interest only repayment period?  Is that interest only repayment period followed by principal and interest repayment period? 

These are the questions that you need to ask as you analyze the loan you are working with to determine what loan type to select.  As you answer these questions, use the loan types list to narrow down your selections.  Ultimately, you should arrive at a single selection.  Try that loan type and see if it does what you need it to do.  If it doesn't, see if there is another loan type that may apply.  If ultimately you are unable to decide on a loan type, contact us.