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

A fixed rate mortgage is a loan with a single interest rate for the entire term of the loan. This means that the borrower knows exactly how much their monthly payments will be for the entirety of the loan and there is no opportunity for the interest rate to adjust. Adjustable rate mortgages (ARMs) are loans which have interest rates that can change over time, usually in response to changes in the market. ARMs typically have a lower interest rate than fixed rate mortgages but, because the interest rate can change, the monthly payments may also fluctuate. The loan agreement usually states a cap on how much the interest rate can increase during a given period, such as annually or quarterly. This allows the borrower to be prepared for a potential increase in their payment. On the other hand, if interest rates decrease, the monthly payments could also decrease, resulting in a lower overall interest expense. When deciding between a fixed rate and adjustable rate mortgage, it is important to evaluate the risks and benefits of each option. Borrowers who are only planning to be in their home for a short period of time may benefit from the lower initial payments of an ARM, while those who plan to be in their home for the longer term may find the security of a fixed rate mortgage to be more attractive.

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