which mortgage is riskier for lender? fixed rate mortgage to adjustable rate mortgage? And why does...

which mortgage is riskier for lender? fixed rate mortgage to adjustable rate mortgage? And why does the adjustable rate mortgage have lower expected yield?

Expert Solution

Fixed rate mortgage are those mortgages in which the payments related to interest rate is fixed in relation to a borrower and it will always be remaining same irrespective of change in the market interest at whereas adjustable rate mortgage will have a clause and it will change to fixed rate at certain point of time so adjustable rate mortgage is flexible from the lenders perspective but it is better from the borrowers perspective.

Hence fixed rate mortgage will always be risky from the lenders perspective because there will be interest rate fluctuation and lender will have no control over it because the rate at which will be paid by the borrower are fixed and so he will be losing out on opportunity gains.

Adjustable rate mortgage have a lower expected yield because it adjustable rate mortgages which are flexible in nature and they will be having to adjust this feature in respect to their overall yield so their overall yield will be decreasing in order to support with their flexibility for the fixed rate loan when we change to the adjustable rate loan.

jeff jeffy answered 2 years ago

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