Fixed Rate vs. Adjustable Rate Mortgages

With a Fixed Rate Mortgage, the interest rate and the amount you pay each month remain the same over the entire mortgage term, traditionally 15 or 30 years. Whereas, with the Adjustable Rate Mortgage (ARM), the interest rate will fluctuate according to the interest rate. The initial interest rate of an ARM is typically offered at a discounted interest rate, or "teaser rate", that is lower than the typical rate for a fixed rate mortgage. However, over time when the initial discounts have expired, the ARM rates will fluctuate as interest rates go up and down. Different ARM's are adjusted based upon different financial indexes - COFI, LIBOR, etc. For your protection to avoid constant and drastic changes, ARM's typically have a "rate cap" of how much and how often the interest rate and/or payments can change in a given year, and over the life of the loan. Some ARM products may include hybrids that change from a fixed to an adjustable rate after a period of years, or "option ARM's" that allow you to choose, on a monthly basis whether to pay a minimum payment, or an interest-only payment, or an ordinary principal plus interest payment, or an accelerated payment amount.

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