Understanding the difference between these two types of mortgages can help you decide what’s best for you!
What Is a Fixed Rate Mortgage?
Fixed-rate mortgages have an interest rate that stays the same throughout the life of the loan. Whether you choose a 30-year mortgage or a 15-year mortgage, your payment of principal and interest will stay the same, month after month.
Your monthly mortgage payment might still change a bit along with changes in property taxes or homeowners insurance. However, in general, a fixed rate mortgage gives you the stability of knowing how much you’ll pay each month for the duration of your mortgage loan.
What’s an Adjustable Rate Mortgage?
An adjustable rate mortgage, or ARM, has a fixed rate for the first few years (the exact time frame depends on the loan) before the interest rate “resets,” at which point your mortgage rate and monthly payments will go up and down based on the index that the mortgage is tied to.
After the initial fixed rate ends, your rate will change once a year, often trending up and down every few years. This can be a bit unpredictable, but no worries—you’ll be insulated from steep increases by a rate cap so that your monthly payment doesn’t rise to unmanageable rates.
What Are the Differences Between the Two?
Both a fixed rate mortgage and an adjustable rate mortgage will allow you to buy a house (great!) and pay in monthly installments over the next several years. While they both get the job done, one or the other might be better for your individual needs. Here are some differences between fixed rate and adjustable rate mortgages.
- Fixed rate mortgages don’t change over time, while adjustable rate mortgages may change several times over the course of your loan.
- Fixed rate mortgages are generally more popular with homeowners than adjustable rate mortgages, as they are more predictable and stable over the years.
- Adjustable rate mortgages often start out at a lower rate than fixed rate mortgages, so they may work well if your living situation is temporary and you’ll only own the house for ~5 or fewer years.
Still wondering which type of mortgage is best for your specific needs? Contact us today to find out how a fixed rate or adjustable rate mortgage can help you purchase the home of your dreams. We’ll help you find the mortgage that’s best for you, whatever your situation.