Management Notes

Reference Notes for Management

Many people prefer a fixed rate mortgage because it

Many people prefer a fixed rate mortgage because it

A. is variable.
B. might go down
C. is predictable.
D. costs the least.

The Correct Answer for the given question is option C. is predictable.

Answer Explanation for Question: Many people prefer a fixed rate mortgage because it

A “fixed-rate mortgage” refers to a home loan that has a fixed interest rate for the entire loan period. The interest rate on the mortgage remains constant throughout. For consumers who are interested in knowing exactly what they will have to pay every month, fixed-rate mortgages are a popular option.

On the market, there are several types of mortgage products, but they can be divided into two basic classes: variable-rate loans and fixed-rate loans. In variable-rate loans, the interest rate is set above a certain benchmark and fluctuates based on certain factors.

A fixed-rate mortgage, on the other hand, has the same interest rate throughout the term of the loan. A fixed-rate mortgage does not fluctuate with the market, unlike variable- and adjustable-rate mortgages. In other words, a fixed-rate mortgage does not change based on changes in interest rates.

For most long-term home buyers, a fixed-rate mortgage provides them with the best interest rate. Fixed-rate mortgages are more predictable. Borrowers know exactly how much they will have to pay each month, so there are no surprises.

The correct answer to the question, “Why do many people prefer a fixed-rate mortgage?” is option C: “is predictable.” This means that a fixed-rate mortgage is favored by many individuals because it offers a level of predictability and stability in terms of monthly payments and overall financial planning.

A fixed-rate mortgage is a type of home loan in which the interest rate remains constant throughout the entire life of the loan. This means that when you secure a fixed-rate mortgage, your monthly mortgage payments will stay the same from the start to the end of the loan term, which is typically 15, 20, or 30 years.

Here’s a detailed explanation of why option C is correct:

Option C: “Is Predictable”

Stability in Monthly Payments: One of the primary reasons people prefer a fixed-rate mortgage is because it provides stability in monthly payments. With a fixed interest rate, borrowers know exactly how much they need to pay each month, making it easier to budget and plan their finances.

This predictability is especially valuable for families and individuals on fixed incomes or those who want to maintain a consistent monthly housing budget.

Protection Against Interest Rate Increases: Fixed-rate mortgages protect borrowers from rising interest rates. If you secure a fixed-rate mortgage at, say, 4%, your interest rate will remain at 4% for the entire duration of the loan.

This is crucial because if interest rates were to increase in the future, borrowers with adjustable-rate mortgages (option A) might see their monthly payments rise significantly, making it difficult to manage their finances.

Now, let’s explain why the other options are not correct:

Option A: “Is Variable”

A variable or adjustable-rate mortgage (ARM) does indeed have an interest rate that can change over time. However, this is not the reason many people prefer fixed-rate mortgages. ARMs may have lower initial interest rates, but they come with the risk of future rate increases, which can lead to higher monthly payments.

The lack of predictability and the potential for higher payments make ARMs less attractive to those seeking stability in their housing costs.

Option B: “Might Go Down”

While it’s true that the initial interest rate on an adjustable-rate mortgage (ARM) might be lower than that of a fixed-rate mortgage, the key concern for most borrowers is the uncertainty associated with ARMs.

While interest rates “might” go down, they also “might” go up, which can result in significantly higher monthly payments. This uncertainty is precisely what many borrowers want to avoid when they opt for a fixed-rate mortgage.

Option D: “Costs the Least”

Fixed-rate mortgages do not necessarily “cost the least” in terms of the total amount paid over the life of the loan. The interest rate on a fixed-rate mortgage is typically slightly higher than the initial rate on an adjustable-rate mortgage.

However, the predictability and stability of fixed-rate mortgages provide peace of mind to borrowers, which may be more valuable to them than potentially saving a small amount on interest costs.

Furthermore, fixed-rate mortgages protect borrowers from the risk of future interest rate increases, which could make an ARM more expensive in the long run.

In conclusion, many people prefer a fixed-rate mortgage because it offers predictability and stability in monthly payments, protects against interest rate increases, and helps borrowers budget and plan their finances effectively.

While adjustable-rate mortgages may have lower initial rates, the uncertainty and potential for higher payments in the future make them less attractive to those seeking financial security and peace of mind.

Therefore, option C, “is predictable,” is the correct answer for why many individuals prefer fixed-rate mortgages.


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