MAJOR FACTORS AFFECTING RAM BENEFITS
The lower the interest rate and the longer the remaining amortization period of the Existing 1st Mortgage , the lower the Breakeven Point / Present Value Cost of a RAM , resulting in greater benefits derived from a RAM . Depending on the many variables involved in the computations , the RAM for a particular property may or may not be viable . There are other factors which are significant in consideration of a RA M , some of which are covered below . The terms of the Existing 1st Mortgage and any other underlying financing will affect the terms of the RA M and may preclude a RAM from being worthwhile . The Amortization Schedule for the Existing 1st Mortgage is the starting point from which critical computations and analysis are made . That Amortization Schedule is computed from the Existing 1st Mortgage Interest Rate ( including any scheduled mortgage rate increases ), the Amortization Period , and any scheduled Balloon Payments .
The current value of the property will be used in computations regarding the effects of Inflation and Leverage ; and is based upon the declining balance of the Existing 1st Mortgage in comparison to the proposed RAM . The results of the computations , analysis , and comparisons regarding Inflation and Leverage are the most questionable and tenuous part of the analysis , as it is based on numerous assumption and variables , including what the inflation rate will be over the remaining term of the existing 1st Mortgage . In addition , as the inflation valuation of the property is the same , regardless of the degree of leverage , I debated on whether it should be included in the computations . Ultimately , I decided that the analysis and computations are being done to compute a breakeven point . That breakeven point is for the primarily purpose of determining if the tax savings were reinvested would it result in more money than the amortization that was being given up . Assuming that the investment selected would also be affected by inflation ( such as an investment in real estate ), then the effect of the difference in leverage would account for that ; and , therefore , be appropriate .
The current annual Inflation Rate in the United States is significantly higher than the typical past inflation rates . A 2 % annual inflation rate is the minimum rate that has been used for analysis purposes ; and is believed to be very reasonable and extremely conservative . Whatever Inflation Rate the property owner deems appropriate will be used .
Starting with an estimated value for the property , as provided by the owner , increases in value is not only affected by the overall Inflation Rate , but also by the specific type of real estate and with consideration for its location , the market in which it is located , how well the property is maintained , the effects of obsolescence , etc . These factors are not normally taken into consideration . Computations regarding inflation and the effects of leverage are made on assumptions and computations involving the difference in the degree of leverage on the RAM in comparison to the remaining ( and declining ) leverage on the Existing 1st Mortgage .
There are , typically , no upfront Fees that are charged on a RAM . A Fee is charged on all regular mortgage payments ( normally 3 %). The payment of this Fee over the term of the RAM has less of a negative impact on the results of the analysis and computations than a cash fee paid when the RAM is placed .
The analysis and computations are based upon the Individual Income Taxes and Tax Rates to which the property owner is most likely to be subject . The property owner or his accountant needs to provide information regarding any situations , which may render the assumptions being made as incorrect . Additionally , taxes to which property owner may be subject , changes in tax rate , tax status , etc . will likely occur over time . Obviously , these cannot be anticipated ; and an analysis is based on an understanding of the current taxes , tax rates , etc . that are in effect ; which will need to be confirmed by the property owner or their accountant . The analysis attempts to adjust for tax due dates ( typically on quarterly tax payment dates , but as the actual dates on which these tax payments are made , and there are variations in due dates in relation to the ends of the quarters or other periods . Thus , the computed figures will vary slightly from the actual .
THE RAM PRESENT VALUE / BREAKEVEN ANALYSIS
The Excel Worksheet created to compute the Present Value / Breakeven Rate for a particular set of variables and assumptions regarding a RAM wrapping an Existing 1st Mortgage exceeds 16,500 cells . The computations and analysis are based on data regarding an Existing 1st Mortgage ( or new mortgage ) for a property that is currently owned or being acquired . Information on which the computations are made comes from the property owner ! A Data Sheet to obtain the information needed for the Breakeven / Present Value Analysis of a RAM is provided to the property owner .
Thousands of sets of variables were computed , and numerous tables were created to study the effectiveness of RAM Mortgages . One such table is as follows :
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