What is the difference between a fixed rate and an adjustable rate mortgage?
A fixed rate mortgage is a mortgage that has an interest rate that stays fixed for the life of the loan. On an adjustable rate mortgage the interest rate changes based upon a specific financial index (such as Government Treasury bill rates) and payments may go up or down based on the movement of that index.
A fixed-rate mortgage charges a set interest rate that does not change throughout the life of the loan. The main advantage of a fixed-rate mortgage is that the borrower is protected from sudden and potentially significant increases in monthly mortgage payments if interest rates rise. The interest rate for an adjustable-rate mortgage(ARM) varies over time. The initial interest rate on an ARM is generally below the market rate on a comparable fixed-rate loan. As time goes by, the interest rate will change based on a specific formula and may exceed the going rate for fixed-rate loans.
With a fixed-rate mortgage, the interest rate stays the same during the life of the loan. With an adjustable-rate mortgage (ARM), the interest changes periodically, typically in relation to an index. While the monthly payments that you make with a fixed-rate mortgage are relatively stable, payments on an ARM loan will likely change. There are advantages and disadvantages to each type of mortgage, and the best way to select a loan product is by talking with our mortgage specialists.
