News and Community
News and Community

ARM, Fixed, Variable: Mortgage Types and Their Rates Explained

When it comes to your a mortgage, the interest rate is everything. The interest rate of your the loan determines how much you pay over the life of the loan. Some mortgage loans have rates that change over time, but why? Here we’ll talk about the differences between Fixed-Rate and Adjustable-Rate, Hybrid mortgages.

Fixed-Rate Mortgages

Fixed-rate mortgages are the most common type of mortgage. That’s because if you qualify for a fixed-rate loan, you know exactly what your monthly payments will be. The interest rate on a fixed-rate mortgage is fixed for the life of the loan. This means that even if interest rates rise, your mortgage rate will not change. There are pros and cons to this type of loan. The major pro is that your rate will not change, and your payments will be consistent. The major con is that if rates drop, you could be paying more than you need to. It’s hard to predict what rates will do in the future, so it’s hard to say when you should switch to a new loan type.

Adjustable-Rate Mortgages

Adjustable-rate mortgages, or ARMs, have an interest rate that responds to changes in the market. This means that your interest rate could rise or fall over the life of the loan. Typically, the introductory rate on an ARM will be lower than a fixed-rate mortgage loan for the first few years, but then adjusts to reflect the current market rate once the initial term ends. The rate on an ARM is determined by an index, which could be the 10-Year Treasury rate, the Consumer Price Index, or some other economic indicator, plus the margin, which is an extra amount that the lender adds. All ARMs have adjustment periods that determine when and how often the interest rate and payment can change. The adjustment period depends on your specific loan, but they are commonly annual or semi-annual.

Summing It Up

If you have a fixed-rate mortgage, you know what your monthly payment will be over the life of the loan. If you have an adjustable-rate mortgage you have no idea what your payment will be once the introductory rate period has ended. Mortgage rates change from month to month and from year to year. It’s important to review and understand the terms of your mortgage loan.