A fixed-rate mortgage loan is a loan where the interest rate remains the same for the entire term of the loan. Interest rates on fixed-rate mortgages are locked up-front and don’t change, as opposed to an adjustable-rate mortgage (ARM). This allows a borrower to accurately predict their future payments.
Fixed-rate mortgages offer a set interest rate, resulting in a fixed payment amount that will not change over the life of the loan. It’s particularly popular with first-time homebuyers and anyone who finds it easier to budget and plan around the predictability of a fixed payment. Fixed-rate mortgage lengths vary, but the most common term is 30 years.
While fixed-rate loan have interest rates that stay fixed, ARMs have interest rates that adjust and vary based on the market. For some, the predictability of a fixed-rate loan is better for budgeting and planning their future. Others who choose an adjustable-rate mortgage prefer to start with a lower up-front payment and then increase periodically.
An adjustable-rate mortgage (ARM) is a home loan with an interest rate that can change periodically. This means that the monthly payments can go up or down. The initial interest rate on an ARM loan is typically lower than a fixed-rate mortgage. At certain periods of the loan, interest rates–and your monthly payments–can fluctuate.
An ARM starts with an introductory fixed interest rate, then adjusts after the introductory fixed interest rate period ends. The rate can move up or down based on the index agreed to in terms. Period terms are set up-front and range between 5-, 7- and 10-year terms.
Interest rates on an adjustable-rate mortgage can change throughout the loan term. While they will have a fixed rate during the introductory period, they can fluctuate based on the market at their adjustment period. Fixed loan rates, on the other hand, stay constant throughout the life of the loan, regardless of market changes. ARMs have interest rates that adjust and vary based on the market.
The predictability of a fixed-rate loan can be better if you prefer to always know what your payment will be. If you are looking for a lower payment, an adjustable rate can offer that in the beginning, just know that it can go up or down at adjustment periods. ARMs do come with caps limiting the amount by which rates and payments change so you are protected from potential steep increases.