A Note on Adjustable Rate and Fixed Rate Mortgage Plans in the US
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Case Details:
Case Code : FINC048
Case Length : 14 Pages
Period : 1990-2007
Pub. Date : 2007
Teaching Note :Not Available
Organization : -
Industry : Banking
Countries : US
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FINC048) click on the button below, and select the case from the list of available cases:
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Please note:
This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.
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Excerpts
Common Types of ARM
There are two types of ARMs - hybrid ARMs and
interest-only ARMs.
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Hybrid ARMs
Hybrid ARMs are a mix, of a fixed-rate period and an adjustable-rate period
mortgage loans. The interest rate is fixed for the first few years of the loan
and then the interest rate can be converted into ARM till the entire loan is
paid off (Refer to Exhibit VII for the national average mortgage rates as of
June 22, 2007)...
Interest-Only ARMs
An interest-only (I-O) ARM payment plan allows the borrower to pay only the
interest on the principle for a specified number of years, (usually between 5
and 10 years), during which the principle remains unchanged.
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After the completion of the interest only period, the loan is amortized and the borrower has to pay back the principal along with the interest each month...
Opting for an ARM Plan
Following are the points, a borrower should consider while
opting for an ARM plan
• If a borrower has a very tight budget and cannot afford any increase in
mortgage repayments then the ARM plan is not suitable.
• The initial interest rate on an ARM plan is usually lower as compared to
other mortgage plans such as FRM...
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Benefits and Risks Associated with ARM
The ARM plan has both advantages as well as
disadvantages for the borrowers. Some of the advantages of the ARM are:
• A lower monthly payment due to the lower initial interest rate.
• A fall in the interest rate results in a decrease in monthly payments
by the borrower.
• Due to the lower initial interest rate and EMI payments, the loan
eligibility of the borrower is high as compared to the case of an
equivalent FRM... |
Excerpts Contd...>>
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