Fixed Rate Mortgage - Quick Facts
by Peter Fisher
FRM short for Fixed Rate Mortgage is one of the kinds of loans, for the purpose of financing personal possessions and assets, charged at fixed rates of interest during the whole life of loan. Federal Housing Authority (FHA) was the one that launched FRM. Apart from FRM, another main kind of mortgage is Adjustable Rate Mortgage (ARM). The rate of interest in ARM vary with variations in index points throughout the mortgage validity. Other kinds of mortgages are known as hybrid mortgages; the rate of interest always varies in these kinds throughout the life of loan, however in some particular time intervals, it remains constant.
The rate of interest in fixed rate mortgage is typically fixed but other charges such as property taxes and insurance can vary.
The total amount due per month is calculated by typical elements, i.e.; rate of interest, tem of mortgage, rate of compounding interest and total loan amount. The fixed monthly payment is the amount paid by the mortgagor by the end of every month to ensure the full payment of the loan with interest by the end of the term.
Following are the characteristics of fixed rate mortgage:
The interest rate in FRM does not depend on the market index; rather it is fixed in advance to an advertised rate in the raises of 1/4 or 1/8 percent.
The rate of interest till maturity of loan is known as "fully indexed rate" and it is determined with sum of index and margin. Term is the length of the mortgage loan and the number of payments depends upon this length and the frequency of the payments.
Fixed rate mortgages are usually more expensive than ARM. As the length of the term increases in the FRM, the interest rate risk increases as well. This is the reason of fixed rate loans being bit expensive as compared to short term loans. The difference between the both durations in the rate of interest and yield curve is their values' difference.
The expensiveness of FRM does not imply it's a bad option; rather the advancer is taking the risk basically. In case the index points rises, then ARM will be more expensive whereas the FRM will be constant.
In some of the countries, the prepayments are allowed without the penalty. This reduces the total amount of the loan, interest on the loan and hence will shorten the length of time needed to pay off the loan.
Often the advancer gives loan at very low rate of interest however he limits the advance payments. In such cases, if advance payments are made the acquirer of the loan has to pay fine too.
The rate of interest in fixed rate mortgage is typically fixed but other charges such as property taxes and insurance can vary.
The total amount due per month is calculated by typical elements, i.e.; rate of interest, tem of mortgage, rate of compounding interest and total loan amount. The fixed monthly payment is the amount paid by the mortgagor by the end of every month to ensure the full payment of the loan with interest by the end of the term.
Following are the characteristics of fixed rate mortgage:
The interest rate in FRM does not depend on the market index; rather it is fixed in advance to an advertised rate in the raises of 1/4 or 1/8 percent.
The rate of interest till maturity of loan is known as "fully indexed rate" and it is determined with sum of index and margin. Term is the length of the mortgage loan and the number of payments depends upon this length and the frequency of the payments.
Fixed rate mortgages are usually more expensive than ARM. As the length of the term increases in the FRM, the interest rate risk increases as well. This is the reason of fixed rate loans being bit expensive as compared to short term loans. The difference between the both durations in the rate of interest and yield curve is their values' difference.
The expensiveness of FRM does not imply it's a bad option; rather the advancer is taking the risk basically. In case the index points rises, then ARM will be more expensive whereas the FRM will be constant.
In some of the countries, the prepayments are allowed without the penalty. This reduces the total amount of the loan, interest on the loan and hence will shorten the length of time needed to pay off the loan.
Often the advancer gives loan at very low rate of interest however he limits the advance payments. In such cases, if advance payments are made the acquirer of the loan has to pay fine too.
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