ECO 212 Week 4 DQ 1 - 7528

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What are the advantages and disadvantages of adjustable-rate versus fixed-rate mortgages?

There are advantages as well as disadvantages of adjustable-rate versus fixed-rate mortgages. Adjustable-rate mortgages usually start out with an initial interest rate below at or below the market while fixed-rate montages are usually about two or more points higher depending on an individuals credit score. The borrower of an adjustable-rate mortgage will have a fixed period at this lower rate then the rates will adjust as the market rate adjusts up to a predetermined cap. The works well went market rates are high and are anticipated to decrease, then this is an advantage because you already started at a lower rate and it will continue to adjust downwards. The disadvantage is the completely opposite; it one takes out an adjustable-rate montage and the interest rates increase, their rates will continue to increase accordingly until the cap is reached. With fixed rate montages, one will start out at a higher rate that an adjustable-rate, but the rate will never change. In the case where the market decreased, their rate will remain the same, putting them at a disadvantage that one that had an adjustable-rate mortgage, however, if the interest rates start to increase, then they will find themselves at an advantage than one with the adjustable-rate as their rates will increase.


Solution Description

What are the advantages and disadvantages of adjustable-rate versus fixed-rate mortgages?

There are advantages as wel