Question: How have the 30year Fixed Rate Mortgage
Rate and the 51 Adjustable Rate Mortgage Rate Varied Over Time? How are these rates currently in comparison
to their past values?
Using the times series on 30year FRM and 51 Adjustable Rate
Mortgages calculate a time series of the mortgage payment on a $200,000
loan. What has been the typical
payment differential? What is the
current payment differential?
Data: The monthly data used in this exercise was
obtained from
Freddie Mac.
The data covered the period January 2005 to August
2014. (January 2005 was the first date
where the 51 ARM data was available.)
Analysis: Statistics on the 30year FRM rate and the
51 ARM rate over the 2005 to 2014 period are presented below.
Statistics on 30year
FRM and 5year ARM rates –
January 2005 to August 2014


30year FRM

5year ARM

Diff.


Average

5.10

4.43

0.67

Median

4.98

4.36

0.62

Standard Deviation

1.01

1.31

0.40

Minimum

3.35

2.61

0.36

Maximum

6.76

6.36

1.49

Q1

4.26

3.04

0.35

Q3

6.13

5.80

1.04

Range

3.41

3.75

1.85

Interquartile Range

1.87

2.76

0.69

Aug14

4.12

2.97

1.15

Observations on rates
and rate differentials:
Both the 30year FRM and the 51 ARM rates remain low.
The 30year FRM is currently 4.12 below the 25^{th}
percentile for the 30year FRM over the period.
The 51 ARM is 2.97 also below the 25^{th}
percentile of the 51 ARM.
The ARM rate is relatively low compared to the FRM rate.
The FRMARM differential in August 2014 stands at 1.15,
which is above the 75^{th} percentile for this differential.
A footnote: It is worth noting that at the worse part of
the financial crisis between December 2008 and April 2009 the 30year FRM was
lower than the 51 ARM. This was
clearly a perverse period. Financial
institutions were collapsing. Banks were not lending. Plus there were expectations of lower rates
and a possible depression.
Payment Calculations:
In order to determine how rate differentials impact mortgage
payments we must insert the observed rates, the period (360 months) and the
loan amount ($200,000) into the PMT function.
I do this and then look at statistics describing the monthly
payment calculations:
Information on
monthly mortgage payments for 30year FRM and 51 ARM January 2005 to August
2014


30year FRM

51 ARM

Diff.

% Diff.


Average

$1,091

$1,012

$78

7.55%

Median

$1,072

$1,000

$74

6.74%

Standard Deviation

$124

$155

$44

4.65%

Minimum

$881

$802

($45)

4.07%

Maximum

$1,299

$1,246

$169

16.72%

Q1

$986

$850

$46

3.63%

Q3

$1,217

$1,174

$119

12.04%

Range

$417

$444

$214

20.79%

Interquartile Range

$231

$324

$73

8.40%

Aug14

$970

$842

$128

13.17%

Example pertains to a $200,000 loan.
Observations on
monthly mortgage payment trends:
The median monthly payment difference over the entire time
period in this example is $74.
The payment difference in August 2014 is $128.
Concluding thoughts: Payment considerations will encourage many
households to choose an ARM over the FRM.
But payment considerations are only one part of the puzzle. ARMS are complex and risky. Households considering an ARM need to look
at this primer.
Primer on adjustable rate mortgages
http://policymemos.blogspot.com/2014/09/aprimeronadjustableratemortgages.html
Primer on adjustable rate mortgages
http://policymemos.blogspot.com/2014/09/aprimeronadjustableratemortgages.html
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