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

A fixed rate mortgage is a loan in which the interest rate remains the same for the entire term of the loan. This type of mortgage offers stability since the monthly payment remains the same during that time. Adjustable rate mortgages, or ARMs, are loans in which the interest rate can fluctuate. The rate may start off low when the loan is taken out, but can change as time goes on. In Pennsylvania, fixed rate mortgages can range from fifteen to thirty years, while ARMs can also range from fifteen to thirty years. ARMs typically have an interest rate that adjusts one to four times a year. The initial and subsequent interest rates are usually based on the market index rate and the lender’s margin. Typically, fixed rate mortgages offer borrowers lower interest rates than ARMs. However, if the interest rates fall after the loan is taken out, then the ARM may provide the borrower with a more attractive rate. It’s important to understand that while ARMs may offer lower interest rates initially, the rate could increase significantly in the future. Therefore, it is important for borrowers to understand their current financial situation and the amount of risk they’re willing to take when choosing between a fixed rate mortgage and an ARM.

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