Analyzing Buydown Rate Loans

The LOAN Procedure

Analyzing Buydown Rate Loans

A 15-year buydown rate loan is another alternative to finance the $100,000 investment. The nominal annual interest rate is 12% initially and will increase to 14% and 16% as of the 24th and 48th payment periods, respectively. The nominal annual interest rate is lower than that of the fixed rate alternative, at the cost of a 1% discount point ($1000) paid at the initialization of the loan. The following BUYDOWN statement represents this loan alternative:

   proc loan start=1992:12;
      buydown amount=100000 rate=12 life=180
              buydownrates=(24=14 48=16) pointpct=1
              label='BANK4, Buydown';
   run;

List of Rates and Payments for Buydown Rate Loans

Figure 13.4 shows the "List of Rates and Payments" in the loan summary table. It reflects the two rate adjustments and the corresponding monthly payments as well as the initial values for these parameters. As of December 1994, the periodic payment of the buydown loan exceeds the periodic payment for any of the other alternatives.

The LOAN Procedure

Rates and Payments for BANK4, Buydown
Date	Nominal Rate	Effective Rate	Payment
DEC1992	12.00%	12.68%	1200.17
DEC1994	14.00%	14.93%	1320.31
DEC1996	16.00%	17.23%	1432.33

Figure 13.4: List of Rates and Payments for a Buydown Rate Loan

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