What is the difference between a fixed-rate mortgage and an adjustable rate mortgage?
A fixed rate mortgage is a loan in which the interest rate does not change during the entire term of the loan. With an adjustable rate mortgage (ARM) the interest rate may periodically adjust on the basis of changes in a specified index. ARM loans can allow you to buy a more expensive home since the interest rate is usually lower than a fixed rate mortgage. However, ARM loans are considered more risky as compared to fixed rate mortgages. For additional information see mortgage loan products.
Fixed-Rate Mortgages With this type of mortgage your monthly payments for interest and principal never change. Property taxes and homeowners insurance may increase, but generally your monthly payments will be very stable. Fixed-rate mortgages are available for 30 years, 20 years, 15 years and even 10 years. There are also “bi-weekly” mortgages, which shorten the loan by calling for half the monthly payment every two weeks. (Since there are 52 weeks in a year, you make 26 payments, or 13 “months” worth, every year.) Adjustable-Rate Mortgages (ARMS) These loans generally begin with an interest rate that is below a comparable fixed rate mortgage, and could allow you to buy a more expensive home. However, the interest rate changes at specified intervals (for example, every year) depending on changing market conditions; if interest rates go up, your monthly mortgage payment will go up, too. However, if rates go down, your mortgage payment will drop also.
Fixed-Rate Mortgages With this type of mortgage your monthly payments for interest and principal never change. Property taxes and homeowners insurance may increase, but generally your monthly payments will be very stable. Fixed-rate mortgages are available for 30 years, 20 years, 15 years and even 10 years. There are also “bi-weekly” mortgages, which shorten the loan by calling for half the monthly payment every two weeks. (Since there are 52 weeks in a year, you make 26 payments, or 13 “months” worth, every year.) Adjustable-Rate Mortgages (ARMS) These loans generally begin with an interest rate that is 2-3 percent below a comparable fixed rate mortgage, and could allow you to buy a more expensive home. However, the interest rate changes at specified intervals ( for example, every year) depending on changing market conditions; if interest rates go up, your monthly mortgage payment will go up, too. However, if rates go down, your mortgage payment will drop also.
