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A home buyer is presented with two options for financing the purchase of a home: a...

A home buyer is presented with two options for financing the purchase of a home: a 20 year fixed rate mortgage or a 20 year adjustable-rate mortgage, where the rate adjusts once a year. Which mortgage would you expect to start at the lowest interest rate and why?

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ANSWER:: Generally, Adjustable rate mortgage borrower would have lower mortgage rate of interest to start. This adjustable rate is linked to the market or base rates which tend to keep adjusting on intervals. The lender usually understands adjustable rate as less risky and that will give less interest rate risk in the long run. But fixed mortgage rates are fixed at begining and they will be same till end and thus lending comes up with extra risk to bank. Hence, banks charge more to fixed rate borrowers.

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