What is an advantage of an adjustable-rate mortgage?

A) A borrower always knows how much to pay the bank each month.

B) A borrower can purchase a home with little financial risk.

C) A drop in interest rates may result in lower monthly payments.

D) A rise in interest rates may result in lower monthly payments.

C) A drop in interest rates may result in lower monthly payments.

Explanation:

Mortgage is a very popular line of credit in the US that consists of placing a property as collateral to get a loan with low interest and longer terms. Mortgage loans can be fixed or adjustable rates. When the rate is fixed, the interest rate will be the same throughout the loan, meaning there is better predictability. When interest is variable, the value of the installments will be linked to changes in the interest rate. This can benefit the borrower because if the interest rate decreases, the interest amount on the installments decreases by the same amount. However, if the interest rate rises, the interest paid on each pair also increases.

A drop in interest rates may result in lower monthly payments in ARM. In situations where the rates decline, the Adjustable rate mortgage will have its rate lowered. Based on short term rates, the ARMs rates maybe significant lower than the fixed rate mortgage. ARM home owner enjoy short-term interest rates that are in most cases lower than the long-term rates experienced in fixed mortgages. This is to mean that, a home owner with ARM can purchase a more expensive home or have a lower payment due to lower initial rates.