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.