Do you need to secure financing for a home that you are buying, but are not sure what type of mortgage is best for you? It will help to know the differences between a fixed-rate and adjustable-rate mortgage.

Fixed-Rate Mortgages

A fixed-rate mortgage works exactly how the name applies when it comes to the interest rate. There is going to be a fixed interest rate that does not change throughout the entire length of the mortgage, which is typically 15 or 30 years. One of the advantages of having a fixed-rate mortgage is that the monthly payments will be predictable throughout the entire length of the loan. The payment you make during the first month is going to be the same as the last month. 

However, the predictable payment means that you do not have to deal with fluctuating interest rates. This can be both good and bad because you won't have your mortgage increase in cost as the interest rate goes up. On the flip side, the only way to take advantage of lower interest rates is to refinance and get a new mortgage, which may not be cost-effective.

Due to all of these factors, a fixed-rate mortgage is best for someone that plans on staying in their home for a long time and want predictable monthly payments.

Adjustable-Rate Mortgages

Adjustable-rate mortgages are also referred to as ARMs and have fluctuating interest rates that change based on current market conditions. However, this is not true for the length of the entire mortgage.

There is typically an introductory period where the interest rate will not change. If you are getting a 5-year ARM, this means that the introductory period is 5 years. The interest rate during that period tends to be lower than a fixed-rate mortgage to make it more appealing to homeowners. However, the interest rate will fluctuate after the fixed-rate period.

ARMs have adjustment periods where the interest rate will change based on market conditions. This can be monthly, quarterly, annually, or whatever the terms of your ARM specify. There is also a limit to how much the interest rate can go up or down, so you and the lender have protection. 

Due to the low introductory interest rate over a fixed period of time, an ARM can be great for someone that is looking to not stay in their home that long and wants to save money upfront. It can also be for homeowners that think that interest rates will go down in the future and they can save money down the road.