Fixed Rate Mortgage

Fixed Rate Mortgage (FRM) is generally defined as mortgage rates that remain fixed over the tenure of the mortgage loan. It is opposed to the Adjustable Rate Mortgage (ARM), which implies that mortgage rates change over the tenure of the loan adjusting to the market indices. Adjusted Rate Mortgages (ARM) are usually about 1% or 0.5% lower initially than Fixed Rate Mortgages (FRM) in case of the USA but follow the volatility of market indices and require a balloon payment at the end of the mortgage loan tenure.

Fixed Rate Mortgage (FRM) is generally defined as mortgage rates that remain fixed over the tenure of the mortgage loan. It is opposed to the Adjustable Rate Mortgage (ARM), which implies that mortgage rates change over the tenure of the loan adjusting to the market indices. Adjusted Rate Mortgages (ARM) are usually about 1% or 0.5% lower initially than Fixed Rate Mortgages (FRM) in case of the USA but follow the volatility of market indices and require a balloon payment at the end of the mortgage loan tenure.

Technically, a mortgage or mortgage loan can be defined as a temporary or conditional pledge of one’s property to a creditor as a security for performance of an obligation or repayment of a debt. There is a contract deed specifying the terms of the mortgage, which defines rights of the creditor upon the mortgaged property. Using investment analysis, a mortgage is defined as a debt instrument secured by collateral of real estate properties and which is required to be repaid by regular loan amortizations.

In terms of economics or legal banking procedures and techniques, mortgage facilitates the transfer of interest on the property to the creditor and gives him conditional ownership over the asset. However, mortgages are today widely regarded as a lien to ones personal property (chattels) or real property (commercial or residential estates).

Fixed Interest Rates are applicable to both residential and commercial real estate properties usually referred to as home and commercial mortgages respectively. Commercial mortgages usually charge a higher fixed rate mortgages than home mortgage loans factoring in the conditions of long repayment periods, uncertainty about the future stream of income and the possibility of liquidation of the company. Commercial mortgages are essentially non-recourse in nature: that is, upon default of payment of the mortgage loan, the creditor has to pay out the remaining amount of the loan if the full amount of the loan is not realized by the sale proceeds of the property in question. Thus only 80% of the loan-to-value ratio (LTV) is forwarded in case of commercial mortgages whereas it is almost 100% in case of home mortgages. Home Mortgages will charge lower mortgage rates than commercial mortgages because of the possibility of foreclosure or appropriation of the property in the event of non-repayment of the loan.

Home mortgages are considered freer on the part of the lender as the repayment is more certain.As mentioned earlier, Fixed Rate Mortgages are fixed over the tenure of the loan and are set at little bit higher than 30-year treasury bonds in case of the USA. The borrower is required to pay the interest on the mortgage or the mortgage rate and a little bit of the principal with the interest on the principal falling over time. In contrast, the ARM mortgage rate may change in response to the Treasury bill rate or the Prime Rate. In case of India, these terminologies vary between fixed or floating interest rates. Home loans, which has experienced tremendous growth in the past few years, has been the factor behind the rise of mortgage financing industry in India. Interest rates on home mortgages vary between 12.5% and 16% for housing loans for periods of 15 years or more. In some cases though, mortgage tenures can extend up to 20 years or more.

In contrast, ARM is generally attached is 11th District Cost of Funds Index (COFI), London Interbank Offered Rate (LIBOR), 12th Month Treasury Average Index (MTA) and the National Average Contract Mortgage Rate. Indices are generally applied on a rate plus margin basis with the margin remaining fixed over the life of the loan. Average ARM and FRM rates in case of USA have fallen hovering around 5.77% and 5.5% for 30 year and 15 year fixed rates respectively; 1 year ARM and 5/1 ARM rates are 5.43% and 5.9 % respectively. 30 year fixed jumbo mortgage rates however hover around 6% in the country and that for 15 year fixed jumbo is 5.7%.

In conclusion, it can be said FRM’s are better than ARM as it allows the borrower to allocate a steady amount of funds towards the mortgage loan repayment. FRM offers steady rates while ARM can help you gain when the rates and one will be on the losing end when the ARM rates rise. Mortgage rates can also be Prime in nature, which are the lowest rates offered by the lender to the most preferred borrower. Mortgage rates, either very high or low, depend on the market pressures as investors may take money out of mortgage funds or may reinvest in them. The Federal Bank’s (of the USA) decision to raise short-term interest rates have influenced the mortgage interest rates readily. The Australian government is also planning to keep the mortgage rates in its latest budget steady, as it had been around 8% in the recent years. In case of England, mortgage rates have been rising above 5.25% in the wake of tight mortgage approvals ever since the Bank of England gained independent control over the monetary policy in 1997.