What is the difference between a fixed-rate mortgage and an adjustable rate mortgage?
A fixed rate mortage is a loan where the principal and interest payment never change during the life of the loan. An adjustable rate mortgage (ARM) is a loan where the interest rate can change periodically. The changes in the interest rate are tied to the appropriate index at the time the rate is subject to change. ARM’s typically start out at interest rates lower than fixed rate mortgages, which makes them attractive to some borrowers. The rates on ARM’s, though, can adjust upward if interest rates go up. (Or downward if interest rates go down.) There is a predetermined cap which defines how high or low the interest rate can adjust. Fixed rate mortgages are beneficial to those who prefer the security of a fixed payment schedule. ARM’s are advantageous to those who do not plan to keep the mortgage for a long time, for those borrowers who do not qualify at higher fixed rates, or for those borrowers comfortable with payments that fluctuate.
A fixed-rate mortgage is a loan in which the interest rate never changes and your payments remain stable throughout the life of your loan. An adjustable-rate mortgage (ARM) is a loan in which the interest rate changes at regular intervals, usually once every year, which is based on the current interest rate. For most ARMs rate adjustments begin after an initial period, usually between three months and five years, during which the rate is fixed. A fixed rate is usually best if you plan to stay in your home for the long term and are buying at a time when rates are relatively low. An ARM is usually best if you plan to move before the rate adjustments begin, or if you are buying when rates are relatively high.
A fixed rate mortgage means that the rate you receive is fixed for the life of the loan. For example, if you have a 30 year fixed loan then the rate you receive on that loan is fixed for all 30 years. An adjustable rate mortgage (ARM) is a loan that is fixed for a specific period of time and adjustable thereafter. For instance, if you receive a 2 year ARM, your loan is fixed for the first 2 years and adjusts every 6 months or year (depending on your program) after the first 2 years.
A fixed rate mortgage is a loan in which the interest rate does not change during the entire term of the loan. With this type of mortgage your monthly payments for principal and interest never change. 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. The right type of mortgage for you depends on many factors including: =Your current financial picture How you expect your finances to change =How long you intend to keep your house =How comfortable you are with your mortgage payment changing from time to time =How much risk you are willing to take.
