5 Important Differences Between Fixed & Adjustable-Rate Mortgages

When you're shopping for a mortgage, you'll probably hear about fixed-rate and adjustable-rate loans. Each has advantages depending on your financial goals, so here are five important differences you should know.

1. Predictable vs. Adjustable Payments

With a fixed-rate mortgage, your principal and interest payment stays the same for the life of the loan. An adjustable-rate mortgage, or ARM, has a fixed payment for an initial period, but the rate can change later based on market conditions.

2. Long-Term vs. Short-Term Ownership

If you plan to stay in your home for many years, a fixed-rate mortgage may provide more long-term stability. If you expect to move or refinance before the adjustment period begins, an ARM may be worth considering.

3. Stability vs. Lower Initial Payments

ARMs often start with a lower interest rate than comparable fixed-rate loans, which can mean a lower monthly payment at first. Fixed-rate loans may start a little higher, but they offer the peace of mind of knowing your payment won't change because of interest rate fluctuations.

4. Future Rate Risk

Once an ARM reaches the adjustment period, your interest rate may increase, decrease, or stay the same depending on market conditions and the loan's terms. Understanding when those adjustments can happen is an important part of choosing the right loan.

5. Choosing the Right Fit

There isn't a one-size-fits-all mortgage. The best choice depends on your budget, your future plans, and how long you expect to own the home, so it's important to discuss your options with your mortgage professional.

Both fixed-rate and adjustable-rate mortgages can be excellent options. Understanding how they work will help you choose the one that best fits your financial goals.