How does the use of adjustable-rate mortgages affect interest-rate risk?

Question

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Adjustable-rate mortgages (ARMs) transfer the interest-rate risk from lenders to borrowers. In an ARM, the interest rate on the loan adjusts over time based on changes in a reference interest rate or index. This means that if interest rates increase, the borrower will have to pay more in interest, while the lender is protected from the risk of rising rates. Conversely, if interest rates fall, the borrower benefits from lower payments. Therefore, ARMs reduce the interest-rate risk for lenders, as they are not locked into a fixed interest rate that might end up being lower than the market rate over time.

How Does the Use of Adjustable-Rate Mortgages Affect Interest-Rate Risk