Two common types of mortgages are fixed rate mortgages and adjustable rate mortgages.
A fixed rate mortgage locks in your interest rate for the life of your loan.
With an adjustable rate mortgage, the monthly payments can change throughout the life of the loan.
If you plan to become a homeowner someday, you’ll likely take out a mortgage to finance your purchase.
A mortgage is a loan to buy a house, and the lender charges interest. You will repay the lender in monthly installments for a fixed term, probably between 15 and 30 years.
To determine a) how much interest you will pay and b) if your rate will change later, you will choose between two types of mortgages: a fixed rate mortgage or an adjustable rate mortgage.
Fixed rate mortgage vs variable rate mortgage: what’s the difference?
With a fixed rate mortgage, your interest rate remains the same for the duration of the loan. If you have a 30-year mortgage, you’ll pay the same rate today as you will in 30 years.
With a adjustable rate mortgage, commonly referred to as ARM, the rates and monthly payments stay the same for a set period of time and then change periodically. For example, a 5/1 ARM locks in your rate for the first five years, then your rate will fluctuate once a year. Your tariff will increase or decrease depending on the evolution of tariffs in the United States.
How to choose between a fixed rate home loan and an adjustable rate home loan
Tanza is CERTIFIED FINANCIAL PLANNER ™ and former Personal Finance Insider correspondent. She has researched personal finance news and has written on taxes, investing, retirement, wealth building and debt management. She ran a bi-weekly newsletter and a column answering readers’ questions about money. Tanza is the author of two eBooks, A Guide to Financial Planners and “The One-Month Plan to Master your Money”. In 2020, Tanza was the Editorial Director of Master Your Money, a one-year original series providing financial tools, advice, and inspiration to millennials. Tanza joined Business Insider in June 2015 and is an alumnus of Elon University, where she studied journalism and Italian. She is based in Los Angeles.