Which type of mortgage typically has higher initial payments but lower overall interest rates?

• A. Adjustable-rate mortgage
• B. Fixed-rate mortgage
• C. Reverse mortgage
• D. Home equity line of credit

Answer: (A)

An adjustable-rate mortgage (ARM) is characterized by its initial lower interest rate, which often makes the initial payments higher than those of a fixed-rate mortgage. The key aspect of an ARM is that it offers a lower average interest rate over the life of the loan compared to fixed-rate mortgages. Initially, the interest rates are typically lower than fixed-rate options, which can lead to higher payments at first due to the way these loans amortize. However, as the rates adjust over time based on market conditions, the total cost of the mortgage may be lower in the long run.

In contrast, a fixed-rate mortgage maintains the same interest rate and payment for the life of the loan, leading to predictability but potentially higher total interest costs if rates decline. A reverse mortgage is designed for seniors to access their home equity without monthly payments, so its structure differs fundamentally, as does a home equity line of credit, which is a revolving credit line secured by the home. These other options do not match the criteria of having higher initial payments but lower overall interest rates like an adjustable-rate mortgage does.