Mortgage types: fixed-rate vs. adjustable-rate

Fixed-rate mortgages

A fixed-rate mortgage is a type of loan where the interest rate remains the same throughout the life of the loan. This means that your monthly mortgage payment will stay the same, making it easier to budget for the cost of homeownership. Fixed-rate mortgages are available in different loan terms, with the most common being 15- and 30-year terms.

Advantages

• Your monthly payment stays the same, making it easier to budget.
• You're protected from rising interest rates, which can save you money over the long term.

Disadvantages

• You may end up paying a higher interest rate than you would with an adjustable-rate mortgage (ARM) if rates drop.
• Your monthly payment may be higher than an ARM in the short term.

Adjustable-rate mortgages

An adjustable-rate mortgage (ARM) is a type of loan where the interest rate can fluctuate over time. The interest rate is typically fixed for an initial period (usually 5, 7, or 10 years), and then adjusts annually based on market conditions.

Advantages

• You may be able to get a lower initial interest rate than a fixed-rate mortgage.
• Your monthly payment may be lower than a fixed-rate mortgage in the short term.

Disadvantages

• Your monthly payment can increase significantly if interest rates rise.
• Your payment can be unpredictable, making it harder to budget for the long term.

When deciding between a fixed-rate and adjustable-rate mortgage, it's important to consider your financial situation and how long you plan to own the property. If you plan to stay in your home for a long time and want the peace of mind of a predictable payment, a fixed-rate mortgage may be the better option. However, if you plan to move or refinance in a few years, an adjustable-rate mortgage could be a good way to save money on interest in the short term.