What does the term “fixed-rate” versus “adjustable rate” mean?
Fixed-rate mortgage has the same total principal and interest payment (P&I) every month. In addition to that amount, a monthly installment of taxes, insurance, and private mortgage insurance will be added to create the total monthly mortgage payment. An adjustable-rate mortgage allows the interest rate charged to go up or down depending on market conditions. There are usually caps placed on the rates to provide the borrower protection against the rate going up too high. Because of the interest rate changes, the principal and interest amount can change at certain intervals set up in the mortgage. These loans tend to have a higher rate of risk. You have the chance the payment may go down, but you have the same chance the payment may increase.
