Adjustable vs Fixed
Interest Rate: With a fixed rate mortgage, the interest rate stays the same throughout the life of the loan. With an ARM, the interest rate can fluctuate over time, based on changes in market interest rates.
Monthly Payments: The interest rate on a fixed rate mortgage remains the same throughout the life of the loan. In contrast, the interest rate on an ARM can change based on market interest rates. ARMs typically have an initial fixed rate period, during which the interest rate stays the same, and then adjust periodically based on a specified index.Tthe monthly payment can change, making it harder to plan ahead.
Risk: With an ARM, there is more risk for the borrower because the interest rate can rise, resulting in higher monthly payments. With a fixed rate mortgage, the interest rate and monthly payment remain the same, providing more stability and predictability.
Initial Rate: ARMs typically have a lower initial interest rate than fixed rate mortgages, making them attractive to borrowers who want lower monthly payments initially. However, the interest rate can rise later on, resulting in higher payments.
Length of the Loan: Fixed rate mortgages are typically offered for 15, 20, or 30 years, while ARMs can be offered for shorter or longer periods of time. Some ARMs, known as hybrid ARMs, have an initial fixed rate period of 5, 7, or 10 years, followed by a period during which the interest rate can adjust periodically.
To help mitigate risk, ARMs typically have caps that limit how much the interest rate can change over time. There are different types of caps, including periodic caps that limit how much the interest rate can change at any given time, and lifetime caps that limit how much the interest rate can increase over the life of the loan.
Ultimately, the decision between an ARM and a fixed rate mortgage depends on your individual financial situation and goals. If you prefer stability and predictability, a fixed rate mortgage may be the better choice. If you're comfortable with more risk and want lower monthly payments initially, an ARM may be more suitable. Always consult a lender when making these decisions.