Do you want to earn some points? How smart are you?

Question

What is the advantage of coverting from fixed to variable cost and vice versa, please include references.

Answer 1

Assuming you arer talking about Mortgages, I can help a little on this subject, but the best way is to already know what your rate is going to be on the variable loan AKA (ARM Loan) Adjustable Rate Mortgage.

There are different kinds or ARM Loans that you can get you will see the reffered to as some of the following:
1/1
3/1
5/1
MTA

The first 3 adjust annually, except for the 3/1 and the 5/1 they have an initial rate that holds for either 3 years and then adjusts annually, or it holds for 5 years and then adjusts annually.

the 3/1 ARM is more common and is usually available to anyone that has a mortgage.

The 5/1 may only be available to homeowners with larger principal balances, say $250,000 and up.

The MTA is a mortgage where the rate changes monthly. The payment for this mortgage is based off of the "super low" rate that you get quoted. Yopur payments on this mortgage will not change for an entire year, but the interest rate will vary monthly.

Example: Your rate on your MTA ARM Loan is stated at closing as being 3.5%, so your payment is based on that. Usuall within the first 2 months, your interest rate will go up to somewhere around market levels, for our example we will use 6.0%.

Your payment has stayed the same all year long, and you look at your mortgage and your balance is higher that when you started the loan. This is Negative amortization, which is not all that common but it happens to people who get these loans and dont dothe math.

Negative amortization is where your payment does not equal the interest due on the loan, and the interest due that month is applied to the principal balance, therefore increasing it.

Negative amortization can only happen with Monthly Option Arm Loans ( MTA).

As far as the other types of ARM loans go, they can be advantageous in a much better light.

If you refi into a 3/1 arm chances are the initial 3 year rate will be lower than the market rate, and your payments will go down, and that will not change for 3 years ( excluding the escrow account variations in tax changes)

If you plan on moving in a few years, the 3/1 or 5/1 loans canbe good.

Another good thing is that they all have rate adjustment Caps, where the rate cannot go above a certain point, such as your initial starting APR is 5% for example usually the rate caps might be the highest is 9 and the lowest 3. You probably would'nt hit 9 but if you did, the rest of the mortgages out there would be higher most likely.

Another important point is to find out what the interest rate is based on, for example is can be based off of the "12 month average of the 1 month average of the us capital rate" ( or something like that, I am getting blury on the name at the moment, but you would want to look at the over rate change to see how quickly that market changes on a yearly basis) this means they will take the last 12 months of the rate index, and divide it by 12 and you have your rate.

Some ARM Loans can even follow the monthly rate of the same index

Another example is they may base it off of the Libor Rate, and I believe that was a foreign market rate. They base your monthly/yearly payments on these rates and adjust accordingly to your rate change month each year.

If you get the index information, you can negotiate what market you want your rate based on.

One important thing you also would need to ask, is if there is a pre-payment penalty, sometimes the penalty can last for the first 2 years of the loan up to 5 years i believe, but if you are going to stay in the house during that time anyway it is not a big deal, also some states have a statute that if you are selling the house you can get out of a pre-payment penalty.

Hope this helps, feel free to ask any actual questions that you have on Mortgages

References:

I worked in Customer service for a LARGE bank and wrote a manual on adjustable rate mortagages to be distributed through the company because none of our local employees understood the "approved training material" and the 2 days class, but I had people in the company that i did not know shaking my hand because they now understood what the customers were asking.

My small manual was written breaking down the workings of the ARM loan, into language that people could understand easily.

if you would like I can also find this for you and let your read it as well.

Answer 2

You don't convert from fixed costs to variable costs. Costs are either fixed, or variable by definition. Fixed costs are things like, rent, that are always going to be the same no-matter how many units are produced. Variable costs are things like, materials, that vary as production increases or decreases. To get your total cost you multiply the variable costs times the # of units produced and add it to your fixed costs.

Answer 3

I feel there isn't an advantage.. People would want a variable rate because its lower..BUT it can go up every year until it hits its cap, whereas with a fixed rate the principal & interest never go up.

Answer 4

I'm very smart. 2pts

Answer 5

ummm

Answer 6

...........................this is a WEIRD question dude why dont u go get a calculator...or something..........like ask it on google or AJ ! ...

Answer 7

easy 2Pt's.