Mortgage Loans

In the early 1980s, most mortgage lenders were making long-term, fixed-rate loans only, and at the same time, most of the funds used to make such loans came from short-term deposits. This was a mismatch that meant that lenders were vulnerable to short-run increases in the cost of deposits, while at the same time the yields from their portfolios responded relatively slowly to rising interest rates. To solve this problem, Adjustable Rate Mortgages (ARMs) were introduced into widespread use in 1981. They were difficult to market at first as homebuyers were accustomed to fixed-rate mortgages (FRMs), and they liked the security of locking in a fixed monthly payment. FRMs became an unaffordable luxury when interest rates increased to the range of 14 to 18 percent. ARMs attracted more borrowers, and this type of mortgage at that time originated with rates several percentage points below fixed-rate loans. Many lenders in addition offered even lower rates for the first year of the loan, and these "teaser" rates were often discounted as low as 6 percent. For several years, ARMs were the most popular form of mortgage (Friedman and Harris 1). However, more recently the appeal of ARMs has lessened with changes in the marketplace. Adjustablerate mortgages (ARMs) have become more expensive than fixedrate mortgages due to the faster descent of longterm rates in early 1996, and many homeowners with ARMs are considering refinancing and locking into a fixedrate loan as a resu

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rm rates. Many borrowers have been considering shifting from an adjustable to a fixed-rate mortgage, though there are risks in doing so. If the rates continue falling and the borrower sticks with his or her ARM, in theory this could be beneficial in the long run. This scenario is considered unlikely, however, as interest rates have a greater chance of stabilizing than falling deeply from where they are today (Spragins 48-49). Borrowers always must be aware of the fact that what they are quoted as a rate is not all that they will have to pay in any case. The standard quote for interest rates is for fixedrate, 30year conforming, or conventional loans, and the rate quoted by mortgage companies and their representatives refers to interest paid on the amount owed while ignoring the additional costs associated with securing a mortgage. The annual percentage rate (APR), which is defined by the truthinlending laws, includes other costs, such as points, which are fees that lenders charge for making mortgages. A point equals 1 percent of the total amount of the loan, so that one point on a $200,000 mortgage is $2,000. Often a mortgage lender is willing to bargain over whether a borrower should pay more points and a lower inte

Category: Economics - M