Abstract

This technical note provides insights into the adjustable rate mortgage (ARM) and fixed rate mortgage (FRM) products. It describes the different parts of ARM, types of ARMs, points that should be taken into account before opting for an ARM, circumstances under which ARM is advisable, and the advantages and risks involved in ARM. The latter portion of the note talks about the FRM. It also discusses the positive and negative attributes of FRM. The note also includes a few numerical examples to illustrate the concept of ARM and FRM.

Learning Objectives

The case is structured to achieve the following Learning Objectives:

• Understand the concept of adjustable rate mortgage loans
• Understand the concept of fixed rate mortgage loans.

Keywords

Adjustable Rate Mortgage, Fixed Rate Mortgage, Equated Monthly Installment, Financial Index, Constant Maturity Treasury rates, Types of ARMs, London Interbank Offered Rate, Treasury Bill, Repayment Schedule, Certificates of Deposit Index, Wachovia Cost of Savings Index, Bank Prime Loan Rate, Margin, Adjustment Period, Rate Cap