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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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.

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.

Finance | Case Study in Management, Operations, Strategies, Finance, Case Studies

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...

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...

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