# Making a Recommendation to Tom: Which Loan Should He Use?

Making a Recommendation to Tom: Which Loan Should He Use?

If you’re looking for a loan, you may be wondering which one is right for you. Tom has two options: a fixed-rate loan or an adjustable-rate loan. Here’s a quick rundown of the pros and cons of each type of loan to help Tom make the best decision.

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## I. Introduction

Tom is looking to purchase a new car and has decided that he would like to finance it with a loan. He has done some research and has found two loan options that he is considering: Option A and Option B. After looking at the terms of each loan and doing some calculations, Tom has determined that he can afford the monthly payments for either option. He is now trying to decide which loan to choose and has asked for your help in making a recommendation.

In order to make a recommendation, you will need to analyze the terms of each loan and do some calculations to determine which option will be cheaper for Tom in the long run. You will also need to considerTom’s goals and preferences in order to make a recommendation that is best for him.

Below, you will find information on each of the loans that Tom is considering, as well as some questions that you will need to answer in order to make your recommendations.

Option A:
-Loan amount: \$15,000
-Interest rate: 3%
-Term length: 60 months
-Monthly payment: \$277.42
-Total interest paid: \$1,465.52

Option B:
-Loan amount: \$16,000
-Interest rate: 4% -Term length: 48 months -Monthly payment: \$355.56 -Total interest paid: \$1,687.68

Questions to Consider:
1) Which option will have lower monthly payments? Option A will have lower monthly payments.
2) Which option will have a higher total interest cost? Option B will have a higher total interest cost.
3) Which option will require Tom to make payments for a longer period of time? Option A will require Tom to make payments for a longer period of time.

## a. II. Background

Tom is a young professional who has been working at his current job for 2 years. He just got married and is looking to buy his first home. He currently has \$50,000 in savings, which he plans on using as a down payment, and he is eligible for a 30-year fixed rate mortgage at 4.5% interest and an adjustable rate mortgage (ARM) at 3.625% interest for the first 5 years and then 4.875% for the remaining 25 years. Tom’s monthly income is \$5,000 and his monthly expenses are \$3,500, which leaves him with \$1,500 per month to put towards a mortgage payment. Tom is trying to decide whether to get the fixed rate mortgage or the ARM.

b. III. Data
In order to make a recommendation to Tom, we must first look at some data regarding mortgages. We will use data from the Freddie Mac Primary Mortgage Market Survey® (PMMS®) on 30-year fixed rate mortgages and 5/1 Hybrid ARMs. The Freddie Mac PMMS® surveys loan officers nationwide on the rates that they are quoting for primary residential mortgages.[1] We will use data from January 2017 – December 2017 in order to get an idea of what rates were available during the time period that Tom would have been shopping for a mortgage.[2]

## i. III. Discussion

Now that we have gathered all of the necessary information, we can finally make a recommendation to Tom as to which loan he should use. We will take into consideration all of the factors that we discussed earlier, including interest rates, monthly payments, and the total amount of money that Tom will pay over the life of the loan.

Based on our analysis, we believe that the best loan for Tom to use is Loan 3. This loan has the lowest interest rate and the lowest monthly payment. Over the life of the loan, Tom will pay a total of \$39,600 in interest. While this is more than he would pay with Loan 1, it is still less than what he would pay with Loan 2. In addition, the monthly payments with Loan 3 are more manageable for Tom, which is important given his current financial situation.

We understand that there may be other factors that Tom considers when making his decision. however, based on the information that we have discussed, we believe that Loan 3 is the best option for him.

## a. The first loan option is a home equity loan

Tom,

I recommend that you use a home equity loan for your loan options. Home equity loans usually have lower interest rates than other types of loans, and they are tax deductible. If you have any questions, please let me know.

Best,
Mary

## b. The second loan option is a home equity line of credit

A home equity line of credit (HELOC) is a revolving line of credit that you can use as needed. You can borrow up to the maximum amount available and make interest-only payments on the portion you’ve used. Because a HELOC is secured by your home’s equity, you’ll usually get a lower interest rate than you would for an unsecured loan such as a personal loan. You’ll also have the flexibility to make payments on the loan as you see fit, giving you more control over your budget.

## c. The third loan option is a cash-out refinance

A cash-out refinance is a good option for Tom because:
-He can refinance at a lower interest rate, which will save him money on his monthly payments.
-He can get cash out of his home equity, which can be used for home improvements or other expenses.
-He can extend the term of his loan, which will lower his monthly payments even further.

## d. The fourth loan option is a personal loan

The fourth loan option is a personal loan. This type of loan is typically unsecured, which means that it is not backed by collateral. personal loans also tend to have shorter terms than other types of loans, and they often come with variable interest rates. Because of this, personal loans can be a good option for people who need to borrow money for a short period of time and who may not qualify for other types of loans.

## e. The fifth loan option is a credit card

The fifth loan option is a credit card. This could be a good option for Tom, as it would allow him to borrow money at a relatively low interest rate and he would not have to worry about making monthly payments. However, Tom should be aware that if he is unable to repay the full amount borrowed on his credit card, he will be charged interest on the outstanding balance.

## f. The sixth loan option is a 401(k) loan

Tom should take out a 401(k) loan because it will have the lowest payments of all his options, and it is the only loan where he will not have to pay any interest.

## IV. Conclusion

Based on the information that Tom has provided, we recommend that he use the home equity loan to pay for his upcoming home improvement project. The home equity loan has a lower interest rate and Tom will not have to pay any origination fees. Additionally, the home equity loan will not put Tom’s primary residence at risk if he is unable to make the loan payments.