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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