Fixed Rate Mortgage vs. Adjustable Rate Mortgage
The main difference between a fixed-rate mortgage and an adjustable-rate mortgage (ARM) is that the interest rate on a fixed rate mortgage will stay the same throughout the life of the loan, typically 15 or 30 years, and the interest rate on an adjustable rate mortgage can move up or down with the mortgage rate market. Borrowers typically chose a fixed rate mortgage especially if interest rates are low when you are buying or refinancing your home. Adjustable rate mortgages generally offer lower rates but run the risk of the rate going up in the future. There is also the possibility the rate could go down as well. Your 5% rate today could drop to 4% next year or end up at 6% if the market rate goes up. In addition, adjustable rates are often quoted as 5/1 or 7/1. What this means in the case of a 5/1 ARM is that the rate does not change for the first 5 years and then “adjusts” to whatever the current market is with various terms and limitations as to how high or low it can adjust to. Generally, ARM’s are for a 30 year or 15-year terms as with fixed rate mortgages, but there is a variety of terms available.
The interest rate of your ARM loan will “adjust” depending upon the terms of your loan agreement, with adjustments coming every three months, every year, every three years, or not until the fifth year. Most ARMs generally come with a rate "cap," which limits the amount a lender can raise the rate when the adjustment is due. The best way to determine which one is right for you is to speak with your loan officer.