The Rate Decision: Adjustable vs Fixed Rate Mortgages

Homebuyers and commercial real estate buyers who borrow funds using mortgages all must face the choice of whether to assume a fixed or an adjustable rate mortgage. Other mortgage forms with alternative characteristics are available, but the deciding question remains the same. Fixed rate mortgages never change over time, but have a high initial rate: adjustable rate, interest-only or hybrid mortgages begin with lower rates, but they change at fixed intervals over time.  In contrast to professionals, consumers are often ill-equipped to understand the benefits and drawbacks of mortgage instruments.  With poor product knowledge they may find the choice between fixed and variable rate mortgages overwhelming.  They need help in making informed decisions.  Giving the bulk of consumers the knowledge that a university level finance course conveys is not possible.  Thus, there is a need for a simple applicable technique that can improve financial choice.  This paper offers a straightforward forecasting model, to make the decision easier and relatively risk free. Adjustable mortgages are not always the best choice, especially in a rising interest rate market or one that has a strong possibility of rising.  The model is a decision making tool that may help ordinary consumers make the best choice.  Alternatively, mortgage company personnel may use the forecast to aid consumers in selecting the best mortgage.

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Exploring the Role of Financial Disclosure Forms in Mortgage Type Selection

Journal of Financial Counseling and Planning ◽

10.1891/1052-3073.28.2.285 ◽

2017 ◽

Vol 28 (2) ◽

pp. 285-299

Author(s):

Travis P. Mountain ◽

Michael S. Gutter ◽

Jorge Ruiz-Menjivar ◽

Zeynep Çopur

Keyword(s):

Treatment Group ◽

Federal Reserve ◽

Group Treatment ◽

Financial Disclosure ◽

Fixed Rate ◽

Type Selection ◽

The Difference ◽

Adjustable Rate ◽

Adjustable Rate Mortgage ◽

Fixed Rate Mortgage

The purpose of this study was to determine whether using a financial disclosure form in a controlled setting can influence consumers’ mortgage selection. This study used a 2 × 2 experimental design where participants were assigned randomly to a control or treatment group. Treatment group participants received a Federal Reserve Board document that contained information explaining the difference between an adjustable-rate mortgage (ARM) and a fixed-rate mortgage (FRM). All participants were presented with two distinct scenarios and were asked to determine the most appropriate mortgage for each. Logistic regression results suggested that receiving the Federal Reserve Board document does make a difference in consumers’ mortgage choice in hypothetical scenarios. Financial knowledge and Truth in Lending Act knowledge were also were important predictors.

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Simulasi Penghitungan Online Kredit Pemilikan Rumah Bank Xyz Berbasis Web di Portal Finansial www.kontan.co.id

ComTech Computer Mathematics and Engineering Applications ◽

10.21512/comtech.v4i1.2702 ◽

2013 ◽

Vol 4 (1) ◽

pp. 190

Author(s):

Albert V. Dian Sano

Keyword(s):

Interest Rates ◽

Web Application ◽

Mortgage Loan ◽

Fixed Rate ◽

Online Application ◽

Mortgage Interest ◽

Mortgage Interest Rate ◽

Adjustable Rate ◽

Adjustable Rate Mortgage ◽

Fixed Rate Mortgage

The objective of this study is to develop an online application of mortgage loan simulation. This application is developed based on a web application in order to be accessible anywhere and anytime. This application is expected to help prospective property’s consumers calculate their financial plans related to decisions concerning the amount of down payment, loan term, and the mortgage system model to be selected. There are two models of mortgage in this application. The first is a fixed and cap rate of interest, with the first three years of the mortgage interest rate of 9.75%, the fourth and fifth year interest of 10%, and the sixth year onwards using a rate cap interest with the indication of 12%. The second model is a 2-year fixed rate mortgage with the first two years rate of 8.5% and the third year onwards using adjustable rate mortgage of interest with the indication of 12%. Calculation formula and the interest rates in this application are obtained from Bank XYZ which is in turn applied in collaboration with financial portal www.kontan.co.id. This application has been tested by over 1000 users and the results are well proven and valid.

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Financial Literacy and the Use of Interest-Only Mortgages

Journal of Financial Counseling and Planning ◽

10.1891/1052-3073.28.2.168 ◽

2017 ◽

Vol 28 (2) ◽

pp. 168-180 ◽

Cited By ~ 5

Author(s):

Martin C. Seay ◽

Gloria L. Preece ◽

Vincent C. Le

Keyword(s):

Financial Literacy ◽

Math Skills ◽

Fixed Rate ◽

Financial Capability ◽

Adjustable Rate ◽

Using Data ◽

Adjustable Rate Mortgage ◽

Fixed Rate Mortgage ◽

Compound Interest ◽

The Relationship

This study explored the relationship between financial literacy and the use of interest-only mortgages using data from the 2009 National Financial Capability Study (NFCS). A series of analyses were conducted to investigate characteristics associated with the use of an interest-only mortgage as a primary mortgage, as compared to fixed-rate mortgage and adjustable-rate mortgage (ARM) options. Consistent results indicate the individuals who incorrectly answered questions related to compound interest, mortgages, and diversification were more likely to be using an interest-only mortgage. Respondents with higher reported math skills were less likely to use an interest-only mortgage, whereas individuals with higher levels of financial confidence were more likely to be using one. These results reinforce concerns about a household’s ability to understand and evaluate complex mortgage products.

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Institutional disparities in the pricing of adjustable rate mortgage loans

The Journal of Real Estate Finance and Economics ◽

10.1007/bf00161715 ◽

1989 ◽

Vol 2 (1) ◽

pp. 31-45 ◽

Cited By ~ 2

Author(s):

Andrea Jane Heuson

Keyword(s):

Mortgage Loans ◽

Adjustable Rate ◽

Adjustable Rate Mortgage

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Evaluating the Interest-Rate Risk of Adjustable-Rate Mortgage Loans

Journal of Real Estate Research ◽

10.1080/10835547.1997.12090865 ◽

1997 ◽

Vol 13 (1) ◽

pp. 77-94 ◽

Cited By ~ 1

Author(s):

Raymond Finance ◽

Thomas Gosnell ◽

Andrea Heuson

Keyword(s):

Interest Rate ◽

Interest Rate Risk ◽

Mortgage Loans ◽

Rate Risk ◽

Adjustable Rate ◽

The Interest Rate ◽

Adjustable Rate Mortgage

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How Do Homeowners Choose Between Fixed and Adjustable Rate Mortgages?

Quarterly Journal of Finance ◽

10.1142/s2010139216500130 ◽

2016 ◽

Vol 06 (04) ◽

pp. 1650013 ◽

Cited By ~ 6

Author(s):

Yevgeny Mugerman ◽

Moran Ofir ◽

Zvi Wiener

Keyword(s):

Interest Rate ◽

Housing Prices ◽

Optimal Choice ◽

Housing Finance ◽

Short Term ◽

Fixed Rate ◽

High Interest Rate ◽

Theoretical Literature ◽

Rate Environment ◽

Adjustable Rate

Housing is the most important asset in the portfolio of most households. Understanding the households’ decision on housing finance has important implications from a policy perspective, due to the effects it may have on the housing prices, on the housing market stability and on household welfare. The theoretical literature on housing finance focused on figuring out the optimal choice between fixed rate mortgages (FRMs) and adjustable rate mortgages (ARMs). We argue that the standard economic criteria are sometimes inadequate to explain household’s choices, which may be motivated by psychological factors. In other words, we claim that household’s choice depends only partially on the findings of the theoretical literature. We examine the effect of changes in the short-term market interest rate on the households’ choice between FRMs and ARMs. We test this effect using a unique data provided to us by the Bank of Israel, which contains detailed information on the household’s decision between FRM and ARM contracts in Israel in the past decade. The results of our analysis demonstrate a significant association between FRM preference and short-term interest rate reduction. Moreover, we find that the change in the short-term interest rate is more salient to the borrowers in periods of a high interest rate environment. We attribute these findings to Tversky and Kahneman (1974) availability and representativeness heuristics.

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Trender i insidens og mortalitet av kreft i Norge

Norsk Epidemiologi ◽

10.5324/nje.v11i2.554 ◽

2009 ◽

Vol 11 (2) ◽

Author(s):

Steinar Tretli ◽

Trude Eid Robsahm ◽

Elisabeth Svensson

Keyword(s):

Case Fatality ◽

English Summary ◽

Classification Rules ◽

Font Size ◽

Treatment Results ◽

Mortality Trends ◽

Calendar Time ◽

Incidence And Mortality ◽

Short Time ◽

Over Time

ENGLISH SUMMARYTretli S, Robsahm TE, Svensson E. Time trends in cancer incidence and mortality in Norway.Nor J Epidemiol 2001; 11 (2): 177-185.The aim of this study is to decribe the trends in incidence and mortality of cancer by calendar time.Most types of cancer, except those with high case fatality short time after the diagnosis, demonstrate alarger increase in incidence than in mortality over time. For persons below 70 years of age during theperiod 1931-95 the mortality rate has been close to constant. Obviously, the mortality of lung andstomach cancer has changed over time, however, these have changed in different direction and almostlevelled out. In this paper, it is discussed how registration routines, classification rules, treatment resultsand the basis of the diagnosis can influence the incidence and mortality trends.

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What sells in a crisis? Determinants of sale probability over a cycle and through a crash

Journal of Property Investment and Finance ◽

10.1108/jpif-02-2017-0013 ◽

2017 ◽

Vol 35 (6) ◽

pp. 619-637 ◽

Cited By ~ 2

Author(s):

David Scofield ◽

Steven Devaney

Keyword(s):

Real Estate ◽

Sample Selection ◽

Sampling Technique ◽

Real Estate Market ◽

Commercial Real Estate ◽

Content Type ◽

Asset Selection ◽

The Uk ◽

Real Estate Cycle ◽

Over Time

Purpose The purpose of this paper is to understand what affects the liquidity of individual commercial real estate assets over the course of the economic cycle by exploring a range of variables and a number of time periods to identify key determinants of sale probability. Design/methodology/approach Analyzing 12,000 UK commercial real estate transactions (2003 to 2013) the authors use an innovative sampling technique akin to a perpetual inventory approach to generate a sample of held assets for each 12 month interval. Next, the authors use probit models to test how market, owner and property factors affect sale probability in different market environments. Findings The types of properties that are most likely to sell changes between strong and weak markets. Office and retail assets were more likely to sell than industrial both overall and in better market conditions, but were less likely to sell than industrial properties during the downturn from mid-2007 to mid-2009. Assets located in the City of London more likely to sell in both strong and weak markets. The behavior of different groups of owners changed over time, and this indicates that the type of owner might have implications for the liquidity of individual assets over and above their physical and locational attributes. Practical implications Variation in sale probability over time and across assets has implications for real estate investment management both in terms of asset selection and the ability to rebalance portfolios over the course of the cycle. Results also suggest that sample selection may be an issue for commercial real estate price indices around the globe and imply that indices based on a limited group of owners/sellers might be susceptible to further biases when tracking market performance through time. Originality/value The study differs from the existing literature on sale probability as the authors analyzed samples of transactions drawn from all investor types, a significant advantage over studies based on data restricted to samples of domestic institutional investors. As well, information on country of origin for buyers and sellers allows us to explore the influence of foreign ownership on the probability of sale. Finally, the authors not only analyze all transactions together, but the authors also look at transactions in five distinct periods that correspond with different phases of the UK commercial real estate cycle. This paper considers the UK real estate market, but it is likely that many of the findings hold for other major commercial real estate markets.

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