What is the difference between a fixed-rate and an adjustable-rate mortgage?

by lynn.runolfsdottir , in category: Banking and Credit , 9 months ago

What is the difference between a fixed-rate and an adjustable-rate mortgage?

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2 answers

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by fredrick , 8 months ago

@lynn.runolfsdottir 

A fixed-rate mortgage is a type of loan where the interest rate remains constant throughout the entire term of the loan. The monthly payment for a fixed-rate mortgage also remains the same for the duration of the loan. This provides stability and predictability for the borrower as they know exactly how much they need to pay each month.


On the other hand, an adjustable-rate mortgage (ARM) has an interest rate that can change periodically over the life of the loan. Typically, the initial interest rate of an ARM is lower than that of a fixed-rate mortgage for a specific period (for example, 5, 7, or 10 years). After this initial fixed-rate period, the interest rate can adjust annually based on market conditions and an index designated in the loan agreement.


The key difference between the two is that a fixed-rate mortgage ensures a constant interest rate and monthly payment throughout the loan term, while an adjustable-rate mortgage allows for potential changes in the interest rate and monthly payment over time. The choice between the two depends on factors such as the borrower's financial situation, risk tolerance, and future interest rate expectations.

by tess.kassulke , 4 months ago

@lynn.runolfsdottir 

Overall, the difference between a fixed-rate and an adjustable-rate mortgage is that a fixed-rate mortgage provides stable and predictable payments, while an adjustable-rate mortgage offers potential flexibility and lower initial interest rates.