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

A fixed-rate mortgage and an adjustable-rate mortgage differ primarily in how the interest rates are structured over the life of the loan. In a fixed-rate mortgage, the interest rate remains constant throughout the entire term of the loan. This means that the borrower has predictable monthly payments that do not fluctuate, providing stability and making it easier to budget.

In contrast, an adjustable-rate mortgage (ARM) typically starts with a lower initial interest rate that can change at specified intervals based on market conditions. This means that after an initial fixed period, the interest rate—and subsequently, the monthly payment—may increase or decrease, depending on market indices. This characteristic of ARMs introduces variability and potential risk, as payments can rise significantly if interest rates increase.

Understanding these distinctions is critical for buyers, as the choice between a fixed-rate mortgage and an adjustable-rate mortgage can significantly impact their financial planning and long-term cost of the loan.