The difference between a fixed rate and an adjustable rate mortgage (ARM) is that with fixed rates the interest rate will not change for that loan’s entire term, no matter what the interest rate market does. With an adjustable rate mortgage, the interest rate is fixed for a predetermined length of time and then interest charged on the outstanding balance may go up or down as market interest rates change.
The main advantage of a fixed-rate loan is that you are protected from sudden and possibly major increases in monthly mortgage payments if interest rates rise. Fixed-rate mortgages offer security with a constant rate and payment through the life of the loan, but they can be more expensive in the short-term.
Many ARMs start at a lower interest rate than fixed rate mortgages, which can be tempting, yet they carry a degree of uncertainty and risk. The initial interest rate may stay the same for three, five, seven or ten years. When this introductory period is over, your interest rate will change, and the amount of your payment will most likely go up.
The interest rate on ARMS is benchmarked against an index plus a margin. An ARM can be based on prime rate, LIBOR index, MTA or other indexes. The payment goes up when this index of interest rates increases. When the index declines, your payment may go down, but not always. All ARMS have a ceiling on how high your interest rate can go, but some ARMs also limit how low your interest rate can go. In addition, the longer the term of the loan, the more likely your interest rate will change because there is more time for rates to move. It is very important to know how your ARM will adjust before signing up for one. You also should not count on selling your home or refinancing your loan before the rate changes. The value of your property could decline or your financial condition could change.
We offer options for both fixed- and variable-rate mortgages and can guide you to the one that’s right for you.