Comparisons
Fixed rate mortgages are usually more expensive than adjustable rate mortgages. Due to the inherent interest rate risk, long-term fixed rate loans will tend to be at a higher interest rate than short-term loans. The relationship between interest rates for short and long-term loans is represented by the yield curve, which generally slopes upward (longer terms are more expensive). The opposite circumstance is known as an inverted yield curve and occurs less often.
The fact that a fixed rate mortgage has a higher starting interest rate does not indicate that this is a worse form of borrowing compared to the adjustable rate mortgages. If interest rates rise, the ARM cost will be higher while the FRM will remain the same. In effect, the lender has agreed to take the interest rate risk on a fixed-rate loan. Some studies have shown that the majority of borrowers with adjustable rate mortgages save money in the long term, but that some borrowers pay more. The price of potentially saving money, in other words, is balanced by the risk of potentially higher costs. In each case, a choice would need to be made based upon the loan term, the current interest rate, and the likelihood that the rate will increase or decrease during the life of the loan.
Read more about this topic: Fixed-rate Mortgage
Famous quotes containing the word comparisons:
“Decade after decade, artists came to paint the light of Provincetown, and comparisons were made to the lagoons of Venice and the marshes of Holland, but then the summer ended and most of the painters left, and the long dingy undergarment of the gray New England winter, gray as the spirit of my mood, came down to visit.”
—Norman Mailer (b. 1923)
“The surest route to breeding jealousy is to compare. Since jealousy comes from feeling “less than” another, comparisons only fan the fires.”
—Dorothy Corkville Briggs (20th century)
“I don’t like comparisons with football. Baseball is an entirely different game. You can watch a tight, well-played football game, but it isn’t exciting if half the stadium is empty. The violence on the field must bounce off a lot of people. But you can go to a ball park on a quiet Tuesday afternoon with only a few thousand people in the place and thoroughly enjoy a one-sided game. Baseball has an aesthetic, intellectual appeal found in no other team sport.”
—Bowie Kuhn (b. 1926)