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 or 15-year mortgage, your principal and interest payments will stay the same, month after month.
Your monthly mortgage payment might still change a bit, along with property taxes or homeowners insurance changes. 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 unpredictable, but no worries—you’ll be insulated from steep increases by a rate cap, so your monthly payment doesn’t rise to unmanageable rates.
What Are the Differences Between the Two?
A fixed-rate and adjustable-rate mortgage will allow you to buy a house (great!) and pay in monthly instalments over the next several years. While they both do the job, one might be better for your 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 throughout 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 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 best mortgage, whatever your situation.
