REAL ESTATE LOANS AND INTEREST

Comparison of Loan Type Alternatives Available in the Contemporary Market

Adjustable rate mortgages (ARMs) are one of the most popular loan types available in the contemporary mortgage loan market (Cotton, 1995, pp. 38 43). ARMs are especially attractive to borrowers "seeking low initial mortgage payments" (p. 43). In the contemporary market, lenders have developed and offer several ARM variations a variety of indexes, margins, caps, reset periods and conversion options.

The Treasury indexed ARMs remain popular, however, borrowers also may opt for ARMs that offer "stable monthly payments for five, seven or 10 years and fixed rate conversion options" (Cotton, p. 45). Flexibility may be structured into ARMs with rate caps and payment caps, "loans that eliminate closing costs paid by the borrower and mortgages with indexes that lag the more traditional Treasury index" (p. 45). Interest rate caps impose periodic and lifetime ceilings on the underlying mortgage's note rate. Such caps limit interest rate hikes in each adjustment period to no more than a specified percentage (usually no more than two), with a specified

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1990 to only 338,001 mortgages in 1993. At the same time, the number of reported refinancings rose from around 12,000 in both 1989 and 1990 to more than 236,000 in 1993. This could be a result of more accurate coding of refinancings . . ., or it could be the result of falling interest rates that prompted borrowers to refinance" (p. 54). Many borrowers select a 15 year term mortgage in order to take advantage of lower interest rates on these shorter term mortgages, and to pay off their mortgage before they retire or their children enter college (Herzog, pp. 50 57). Interest rate comparisons for 15 year fixed rate mortgages, 30 year fixed rate mortgages, and ARMs for the period 1981 through 1993 are presented in Table 2, which may be found beginning below on this page. Table 2 Interest Rate Comparison: 1981 1993 __________________________________________________________ Year 30 Year Fixed Adjustable 15 Year Fixed 1981 14.17% 14.83% 1982 14.21% 12.01% 1983 12.17% 11.08% 1984 12.87% 12.39% 12.13% 1985 11.88% 9.64% 11.41% 1986 9.79%
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