Understanding Fixed vs. Adjustable-Rate Mortgages
When applying for a mortgage, one of the most significant decisions you will ever make is to decide between having a Fixed-Rate Mortgage (FRM) or an Adjustable-Rate Mortgage (ARM). Here is the difference to enable you to grasp it:
Fixed-Rate Mortgage (FRM)
Definition:
A fixed-rate mortgage is a loan whose interest rate stays unchanged throughout the lifetime of the mortgage.
Key Features:
Predictable Payments: Monthly principal and interest payments remain the same.
Long-Term Stability: Best for homeowners who will be living in their home for a long time.
Common Terms: Typically found in 15, 20, or 30-year terms.Advantages:
Simplified budgeting through fixed payments.
Insurance against increasing interest rates.Disadvantages:
Initial rates are generally higher than ARMs.
Less adaptable if rates fall.
Adjustable-Rate Mortgage (ARM)
Definition:
The interest rate on an adjustable-rate mortgage can fluctuate over time, based on changes in a related financial index.
Key Features:
- Initial Fixed Period: Typically has a lower rate for the initial 5, 7, or 10 years.Adjustment Period: Once the first term is over, the rate can go up or down each year.
Advantages:
Lower initial interest rates.
Possible savings if interest rates remain low.Disadvantages:
Uncertain future payments.
Danger of much higher payments if interest rates increase.Which Is Best for You?
Select a Fixed-Rate Mortgage if you prefer long-term stability and intend to live in your home for a very long time.
Select an Adjustable-Rate Mortgage if you expect to move or refinance within the fixed-rate time frame, and desire lower initial payments.