Understanding the difference between Fixed vs. Adjustable Rate Mortgages
Fixed-Rate Mortgage
This type of loan has an interest rate that doesn’t change over the life of the loan, so monthly payments for principal and interest (P&I) do not fluctuate. They typically have a 15- or 30-year term length, though they can be for any length the borrower and lender agree upon.
Benefits:
• Predictable monthly P&I payments allow you to budget more easily
• Protection from rising interest rates for the life of the loan
• May be a good choice if you stay in your home for a long time
Considerations:
• The overall interest paid is higher on a longer-term loan than a
shorter-term loan
• Shorter-term loans typically have higher interest rates than
longer-term loans
Adjustable Rate Mortgage (ARM)
This type of loan has interest rates that are adjusted periodically based on changes in overall interest rates. If interest rates rise, you can expect to see an increase in what you pay monthly. Your interest rate and monthly P&I stay the same for an initial period of 5, 7 or 10 years, then are adjusted annually.
Benefits:
• Often has an interest rate cap that sets a limit on how high your
interest rate can go
• Loans available in a variety of longer terms
Considerations:
• Monthly P&I payments may increase when the interest rate adjusts
• Monthly P&I payments may change every year after initial fixed
period is over
Source: Prosperity Home Mortgage
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