What is the difference between a Fixed-Rate and Adjustable-Rate Mortgage (ARM)?

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When it’s time to shop for a mortgage, there’s much to consider. You must research different loan options, hire an expert mortgage broker, and find a reliable lender. While performing all these crucial tasks, you must answer one big question- whether to get a fixed- or an adjustable-rate mortgage (ARM). Are you wondering what these terms are and why does it matter?

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Many loan features must be considered if you’re looking to get a mortgage. One such important consideration is choosing between a fixed-rate or adjustable-rate mortgage. As you know, the fee for borrowing money is known as interest. This rate of interest depends on the type of loan program you choose and your credit score. The loan programs offered by mortgage lenders are basically of two types- fixed-rate mortgages and adjustable-rate mortgages (ARMs). The major difference between these two types of mortgages is how the interest rate works. So, to select the best mortgage option for your current needs and future goals, you must first understand ARM and a fixed-rate mortgage.

Fixed-Rate Mortgages

A fixed-rate mortgage charges a fixed rate of interest that does not change throughout the life of the loan. Irrespective of what happens in the economy, your monthly mortgage interest rate will remain the same. This type of loan is popular because it gives homeowners a sense of security and makes budgeting easy. So, the main benefit of getting a fixed-rate loan is protection from sudden and potentially higher interest rates. This type of mortgage will not increase your monthly mortgage payments suddenly if interest rates rise. Moreover, understanding how fixed-rate loans work is quite simple.

However, there are also some drawbacks to this type of loan. Refinancing a fixed-rate mortgage can be difficult if and when rates decrease. If IFT rates go down, you can’t take benefits. Also, when interest rates are high, qualifying for a loan is more difficult because the payments increase.

Adjustable-Rate Mortgage (ARM)

An adjustable-rate mortgage, or ARM, is a loan type where the interest rate adjusts over time. This type of loan begins with a fixed interest rate for a specific period. Once your introductory fixed-rate period expires, the interest rate changes according to the market condition. This type of loan is lucrative initially because borrowers get a lower starting monthly payment. However, the loan’s interest rate will adjust when that introductory fixed-rate period ends and your monthly payments may increase significantly. This mortgage is also known as a negative amortization loan.

There are some advantages of ARMs also. It’s a good option for short-term borrowing needs. If you’re a first-time home buyer and need a lower initial rate to qualify for the loan, you may consider an ARM. Also, you won’t need to refinance if interest rates go down.