What is the difference between a fixed-rate and adjustable-rate mortgage (ARM) loan?
Answer: The difference between a fixed rate and an adjustable rate mortgage, is that for fixed rates the interest rate is set when you take out the loan and will not change. With an adjustable rate mortgage, the interest rate may go up or down.
With a fixed rate mortgage, the interest rate is set when you take out the loan and will not change.
With an adjustable rate mortgage (ARM), the interest rate may go up or down. Many ARMs will start at a lower interest rate than fixed rate mortgages. This initial rate may stay the same for months or years. When this introductory period is over, your interest rate will change and the amount of your payment will likely go up.
Part of the interest rate you pay will be tied to a broader measure of interest rates, called an index. Your payment goes up when this index of interest rates moves higher. When interest rates decline, sometimes your payment may go down, but that is not true for all ARMs. Many ARMs will limit the amount of each adjustment, and set a maximum or “cap” on how high your interest rate can go over the life of the loan. Some ARMs also limit how low your interest rate can go.