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Chapter 8: Problem 17

Describe one advantage and one disadvantage of an adjustable-rate mortage over a fixed-rate mortgage.

Short Answer

Expert verified
An advantage of an adjustable-rate mortgage is that it often starts with lower interest rates than fixed-rate mortgages, making initial monthly payments lower. A disadvantage is the uncertainty of changing interest rates, which can lead to higher monthly payments in the future.

Step by step solution

01

Advantage of Adjustable-Rate Mortgage

One advantage of an adjustable-rate mortgage is that it often starts with lower interest rates than fixed-rate mortgages. This means that the initial monthly payments will be lower, making it affordable for borrowers who may anticipate a rise in their income in the future or for those who plan to sell or refinance their home before the rates adjust.
02

Disadvantage of Adjustable-Rate Mortgage

The main disadvantage of an adjustable-rate mortgage is uncertainty. Since the interest rate changes over time, monthly payments can increase, which can be financially stressful for homeowners, especially if they are on a tight budget. On the other hand, a fixed-rate loan offers predictable payments throughout its lifespan, offering financial stability.

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