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Explain the difference between a fixed-rate mortgage and an adjustable-rate mortgage. Include a...

Question:

Explain the difference between a fixed-rate mortgage and an adjustable-rate mortgage. Include a discussion of mortgage borrowers versus mortgage lenders' preferences for each.

Mortgage Loan:

The mortgage loan is the loan offer to purchase the property. The mortgage rate would depend on the bank offer and the purchaser's credit worthiness.

Answer and Explanation:

A fixed-rate mortgage is the mortgage loan with the blocked interest rate over the lending period. Alternatively, the offer rate would be blocked for the entire life of the loan even though the market interest rate has changed.

An adjustable-rate mortgage is the loan that its interest rate would be changed according to the market condition after the fixed-rate period. Or, after the period that the interest is blocked, the interest will then be floating.

As the borrowers, we would prefer to stabilize the periodic interest that we have to pay during the life of the mortgage loan. In order to lower the actual cost of the loan, we are able to pay extra money for our loan or refinancing. The fix-rate offer will be realized as the best choice for the borrowers if the interest rate increases in the future.

As the lenders, loan providers expect to earn as much money as possible. The blocked interest rate loan will sustain their income, but it will result a loss if the interest rate is rising in the future. However, the floating rate would be more favorable to the banks in the complexity of the economy.


Learn more about this topic:

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Buying a House: Mortgage Types & Loan Length

from Finance 102: Personal Finance

Chapter 7 / Lesson 4
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