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TimeValue Software Blog

Handling Variable Rate Changes

By Martel Pellerin

All versions of TValue amortization software will handle variable rate loans. Normally, loan payments change as the rates change and the term stays the same. Here is a simple calculation to show you the process for doing rate changes in TValue.

To do a rate change in TValue, it is an iterative process but it is logical to do. The key is to calculate the payment at a rate over the remaining term, change the Number to the number of payments at this rate, add a Rate Change event, and then calculate the new payment at the new rate over the remaining term.

For example, the loan is $200,000 at 3.5% over 360 months. In TValue, you would enter the Nominal Annual Rate of 3.5%, a Loan on line 1 for 200,000, and the Payment on line 2. On line 2, you would input “U” for unknown for the Amount, 360 for the Number, and then click Calculate. This would give you a payment of 898.09 at 3.5%.

Let’s assume that after 12 months the rate changes to 4.5% and the remaining payments would also change. Working with the same schedule in TValue, you would change the Number on line 2 from 360 to 12 as there are only 12 payments at this amount. Next, you would go to line 3 and select Rate Change as the Event. Change the Rate on line 3 to 4.5%. Go to line 4 and add a Payment line, put in “U” for the Amount, and 348 for the Number. Click Calculate and your new payment is 1,010.22 for the 348 remaining payments. The loan is still 360 payments, but you now have 12 payments at the initial rate and 348 payments after the rate change. If you have future rate changes, you can continue to change the rates and related payments using the same methodology. The trick is to build the schedule in the right sequence. The total payments always need to add up to 360.

In TValue 6, we have the Adjustable Mortgage Guide that will do this process for you. There are options of doing a 3/1, 5/1, or 7/1 ARM. You just enter the assumptions and the Guide will build the cash flows for you.