One reason why adjustable-rate mortgages (ARMs) have become popular has to do with the impact that they have on the interest rate risk that is borne by the parties involved. If interest rates were to rise on a level-payment mortgage (LPM) the interest rate risk of the loan would typically be borne by:
A) the borrower only
B) the lender only
C) both the borrower and lender
D) neither the borrower nor the lender

Question

Quizplus · Accepted Answer

In a level-payment mortgage (LPM), the interest rate risk is typically borne by the lender. This is because the interest rate is fixed for the duration of the loan, meaning if market interest rates rise, the lender cannot adjust the rate of the loan to reflect this increase and thus misses out on potential higher returns.

One Reason Why Adjustable-Rate Mortgages (ARMs) Have Become Popular Has