Adjustable rate mortgages
A)reduce the interest-rate risk for financial institutions.
B)benefit homeowners when interest rates rise.
C)generally have higher initial interest rates than conventional fixed-rate mortgages.
D)allow borrowers to avoid paying interest on portions of their mortgage loans.

Question

Quizplus · Accepted Answer

Adjustable rate mortgages (ARMs) shift the interest rate risk from the financial institutions to the borrower. Unlike fixed-rate mortgages, where the interest rate remains constant throughout the term of the loan, ARMs adjust at specified intervals based on market interest rates. This means that when interest rates rise, the lender does not bear the cost of having locked in a lower rate, as the rate on the mortgage adjusts upward. Conversely, when rates fall, the borrower benefits from lower payments. This mechanism reduces the interest-rate risk for lenders, as they are not stuck with the terms of a loan that may become unprofitable if interest rates increase significantly.

Adjustable Rate Mortgages