Question

Adjustable-rate mortgages often start out low and then "adjust" to a higher rate after a few years. Fixed-rate mortgages are guaranteed to stay at the same rate over the life of a loan, but are usually more highly priced. Would you take the risk of buying with a lower-cost adjustable-rate loan? Why or why not?

Answer 1

It all depends on the degree of consumer risk aversion. Some consumers are more likely to be at risk than others. If my propensity for risk in the face of the possibility of a premium is greater, I will prefer the adjustable hypotheca, which gives me the chance to pay less in the end. If I am a risk averse consumer, I will prefer a fixed hypotheque that will give predictability to my budget.