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What is an Adjustable or Fixed rate Mortgage?

By Eric Goodwill

Tips to help you understand the difference in adjustable and fixed rate mortgages.

An adjustable rate mortgage, commonly referred to as an ARM, is exactly that, a mortgage rate that can be periodically adjusted. The interest rate is based on one of several indexes in the financial world. It can be based on the One Year Constant-Maturity Treasury Securities, the Cost of Funds Index or the rates offered by the London Interbank. meaning that they will use an average of the current interest rates to determine what your rate will be. Some financial institutions will base the rate on their own Cost of Funds Index.

Initial Rate

The initial adjustable mortgage rate may remain in effect for a period of from one month to five years. When the APR, or Annual Percentage Rate, is much higher you should anticipate that your rate will rise. Your monthly payment of principal and interest will also rise. Likewise, if the interest rate decreases then your payment will decrease. It’s up to you to decide if you want an adjustable or a fixed mortgage rate.

Fixed Mortgage Rate

With the fixed mortgage rate you don’t have to be concerned about drastic changes in your payment of principal and interest. Your monthly payment could remain the same throughout the term of the loan, but it’s not likely.
You will not have to plan for large increases that may happen with the adjustable mortgage rate.

Premium Increases

However, there will probably still be slight increases in the monthly payment for the ARM, over the life of the loan, but the increase will not be due to a changing mortgage rate. An increase may occur if the homeowners or hazard insurance premium increases and your payment is not enough to cover it. So either way there is the chance of a slight increase with an adjustable mortgage rate as well as the fixed mortgage rate.

Related posts:

1. What Happens To An Adjustable Rate Mortgage When It Is Reset?
2. What Is Negative Amortization For An Adjustable Rate Mortgage?
3. Why Did The Payments On My Fixed Rate Mortgage Change?
4. When is an Adjustable Rate Mortgage a Good Idea?
5. How Soon Can I Refinance An Adjustable Rate Mortgage?