The Economic Consequences of Homelessness in The US

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 [3] 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.
Pricing
Note: Fixed-rate mortgage interest may be compounded differently in other
countries, such as in Canada, where it is compounded every 6 months.
The fixed monthly payment for a fixed rate mortgage is the amount paid by the borrower
every month that ensures that the loan is paid off in full with interest at the end of its
term. This monthly payment depends upon the monthly interest rate (expressed as a
fraction, not a percentage, i.e., divide the quoted yearly nominal percentage rate by 100
and by 12 to obtain the monthly interest rate), the number of monthly payments called
the loan's term, and the amount borrowed known as the loan's principal; rearranging
the formula for the present value of an ordinary annuity we get the formula for :
For example, for a home loan for $200,000 with a fixed yearly nominal interest rate of
6.5% for 30 years, the principal is , the monthly interest rate is
, the number of monthly payments is , the fixed
monthly payment
. This formula is provided using the financial function
PMT in a spreadsheet such as Excel. In the example, the monthly payment is obtained
by entering either of the these formulas:
=PMT(6.5/100/12,30*12,200000)
=((6.5/100/12)/(1-(1+6.5/100/12)^(-30*12)))*200000
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