{"id":4687,"date":"2016-08-09T07:19:00","date_gmt":"2016-08-09T13:19:00","guid":{"rendered":"http:\/\/karengustin.com\/why-shorter-terms-pay-lower-interest-rates-and-other-interesting-facts\/"},"modified":"2019-09-26T12:31:41","modified_gmt":"2019-09-26T19:31:41","slug":"why-shorter-terms-pay-lower-interest-rates-and-other-interesting-facts","status":"publish","type":"post","link":"https:\/\/karengustin.com\/why-shorter-terms-pay-lower-interest-rates-and-other-interesting-facts\/","title":{"rendered":"Why Shorter Terms Pay Lower Interest Rates And Other Interesting Facts"},"content":{"rendered":"
Where is the logic in the way that lenders choose\u00a0interest rates? Why are fifteen-year home loans cheaper than thirty-year mortgages? To understand how banks and finance companies set prices you have to look at it from their perspective, the point of view of the people who are lending the money. They are in it to earn a living from the interest that they charge on the home loans they write.<\/p>\n
The basics are very simple in lending: Give a lump sum in return for security and accept a series of payments in return. Long ago academics and financiers sat down and established the mathematics of interest rate theory. There is a standard way to measure what is and what is not a good interest-paying investment. One of the principles is that a shorter amortization<\/a> period, with fewer payments, is more desirable than a longer term; this means a lower rate of interest on the loan.<\/p>\n A similar incentive exists for adjustable rate mortgages. One of the risks of lending funds over extended\u00a0terms at\u00a0fixed rates if interest is the danger of missing future opportunities if interest rates rise significantly. So that risk is factored into the rate on fixed loans, and the chance to adjust interest rates means that ARMs have a slightly lower rate, if all other terms are equal.<\/p>\n In practice, the underwriters who originate the loans will usually sell them into the secondary market.\u00a0Organizations like Fannie Mae<\/a> and Freddie Mac bundle them together and use the cash flow to securitize the cash flow as bonds.<\/p>\n The stability and value of mortgages as investments matters most to the investors who hold these bonds for the incomes they produce, and so it gives the secondary market an influence over the rate you get offered on the mortgage market. Again, faster repayment means getting investments back sooner and a willingness to accept lower interest payments for lower risk.<\/p>\nWho Is Working For Whom?<\/h2>\n