A bank customer is buying a Single-Family Residence (SFR) appraised at $400,000 and asks for a 30-year conventional mortgage loan to finance $300,000. Her FICO score and her Debt-to-Income (DTI) are sufficient for this mortgage. She asks what the difference in rate would be for an FRM or an ARM with no points required for either. She anticipates living in the SFR for at least 20 years until her retirement.
a. What are the differences in risks that cause the bank to offer both types of mortgages yet with different initial loan rates?
b. Which option do you think will be more attractive to the borrower – and why?