A fixed-rate mortgage is a mortgage in which the interest rate remains the same throughout the entire term of the loan. This means that your monthly mortgage payment will remain the same, regardless of changes in interest rates or inflation.
- Predictable payments: With a fixed-rate mortgage, you can budget for your mortgage payments knowing they won’t change.
- Stability: Your interest rate will not change, making it easier to plan for the future.
- Protection from interest rate hikes: If interest rates rise, your mortgage payment will remain the same.
- Higher initial interest rate: Typically, fixed-rate mortgages have a higher interest rate than adjustable rate mortgages.
- Less flexibility: If interest rates decrease, you won’t be able to take advantage of lower rates without refinancing.
An adjustable-rate mortgage (ARM) is a mortgage in which the interest rate is subject to change over the life of the loan. The interest rate is typically fixed for a certain period, such as five or seven years, before it starts to adjust based on market conditions.
- Lower initial interest rate: Typically, adjustable-rate mortgages have a lower interest rate than fixed-rate mortgages.
- Potential for lower payments: If interest rates decrease, your mortgage payment could decrease as well.
- Flexibility: If you plan on selling your home or refinancing before the rate adjusts, an ARM may be a good option.
- Uncertainty: Because your interest rate can change over time, your monthly mortgage payment could increase, making it harder to budget.
- Risk of interest rate hikes: If interest rates rise, your monthly mortgage payment could increase.
- Complexity: ARMs can be more complicated than fixed-rate mortgages, making them more difficult to understand.