Fixed-rate and ARMs
What is the difference between a fixed-rate loan and an adjustable-rate mortgage? The answer is in the name.
A fixed-rate mortgage is a home loan that has an interest rate that will not change for as long as you keep the loan. While the interest stays the same, the term or length of time to pay off the loan can vary. The most popular fixed rate loans are the 30-year fixed rate loan and the 15-year fixed rate loan.
An adjustable rate mortgage (ARM) is a mortgage with an interest rate that will vary over the term of the loan. ARM’s will usually start off with a low introductory rate, and when the introductory period is over the rate will change. In most cases, the rate will go up and your payment may go up as well. ARM’s are based on an Index. Your payment goes up when the Index of interest rates increase, and the same would be true when the index goes down. Some ARM’s have “caps” that limit how high or low your interest rate can go.
Pro Tip: Homeowners sometimes take out ARM’s for the low introductory rate, but don’t just assume the option to refinance or sell will be available when you are ready. As we have seen in the past, the value of your property could decline, or your financial condition could change. You should be prepared to make the higher payments on the income you have today.
