Fixed-rate mortgages and adjustable-rate mortgages (ARMs) are the two primary mortgage types. While the marketplace offers a variety within these two categories, the first step when shopping for a mortgage is determining which of the two main loan types best suits your needs.
A fixed-rate mortgage charges a set rate of interest that remains unchanged throughout the life of the loan. Although the proportion of principal and interest paid each month varies from payment to payment, the total payment remains the same, which makes budgeting easy for homeowners.
The biggest advantage of an adjustable-rate mortgage (ARM) is that it is considerably cheaper than a fixed-rate mortgage, at least for the first three, five, or seven years. ARMs are also attractive because their low initial payments often enable the borrower to qualify for a larger loan, and, in a falling-interest-rate environment, allow the borrower to enjoy lower interest rates (and lower payments) without the need to refinance the mortgage.
Takeaways:
● A fixed-rate mortgage charges a set rate of interest that does not change throughout the life of the loan.
● The initial interest rate on an adjustable-rate mortgage (ARM) is set below the market rate on a comparable fixed-rate loan, and then the rate rises (or possibly lowers) as time goes on.