What’s the difference between adjustable rate mortgages and fixed rate mortgages and, most important, which one will work better for you?
Understanding the difference starts with understanding interest rates, one of the four parts of your monthly mortgage payment. (The other three are principal, taxes and insurance.)
With a fixed rate mortgage, the interest rate remains constant throughout the life of the loan. With an adjustable rate mortgage, often known as an ARM, the rate varies. Homeowners with adjustable rate mortgages will often refinance to fixed rate mortgages, if available, to benefit from a greater degree of certainty.
A homeowner may choose to refinance to an adjustable rate mortgage if they plan on paying off the loan more quickly and are not as concerned with the possibility of future rate increases. Shortening the life of a loan often means spending less in interest payments and paying off the mortgage sooner.
Likewise, because adjustable rate mortgages often will allow people to lock in lower rates upfront, homeowners who aren’t planning to stay in a property for a long period of time may switch to ARMs to take advantage of a lower interest rate.