What's the difference between a fixed rate and an adjustable rate?
Fixed Rate - With a fixed rate mortgage your monthly payment will always be
the same for the life of the loan. The benefit is that you always know what your principal and
interest costs are.
Adjustable Rate Mortgage - In comparison, an adjustable rate mortgage (ARM) is a loan that will
fluctuate your payment and interest rate during the life of the loan. Most ARMs start off with
a set interest rate and principal payment for the first year and then adjust annually.
The interest rate on your loan is set to reflect changes in the index interest rate. As the
index interest rate changes, your payment will be adjusted annually to reflect those changes.
Both types of loans have their pros and cons. For example, a fixed rate mortgage is
appealing because you always know what your payment will be. On the other hand, when interest
rates are high, choosing the adjustable rate mortgage is favored because it is probable that the
interest rate will drop in the future, resulting in smaller monthly payments. However, with an
adjustable rate mortgage you run the risk of ending up with a higher payment should the interest
rate soar during the life of the loan.
Adjustable rate mortgages can be advantageous because they generally offer a lower initial interest
rate than a fixed rate loan, but an increase in the interest rate will result in a higher monthly
payment, unlike the fixed rate loan.
Which is Better: Fixed or Adjustable? »