Fixed Rate Mortgage versus ARM

With a Fixed Rate mortgage, you receive an interest rate that remains constant throughout the term of the loan. Some people find set payments easier to manage, and the fixed loan provides the stability for which they are looking.

30 Year fixed rate
The 30 Year fixed mortgage is the backbone of the mortgage financing industry. With this mortgage the interest rate you receive remains the same throughout the term of the loan. Of course, you have the option to refinance should interest rates lower over time. See Refinance for more information.

Loan Type: 30 Year Fixed Rate Loan

Definition: The interest rate and payment do not change over the 30 year repayment period.

Benefits: Principle and interest payments never increase because the rate is fixed (it stays the same) over all 30 years.

Drawbacks: The equity in your home will take a long time to buildup.
Note: This is the most popular mortgage in the US, and a good choice when rates are low or you will be in staying in the home for more than 5 years.

15 Year fixed rate
The 15 Year fixed mortgage is mostly used by people who want to build equity in their home more quickly and pay off their mortgage in a shorter period of time.

Loan Type: 15 Year Fixed Rate Loan

Definition: The interest rate and principle and interest payments do not change over the 15 year repayment period.

Benefits: Typically you can obtain a lower interest rate than the 30 year fixed rate loan, plus less interest is paid because the loan is paid off sooner. Another benefit is that the equity in your home is built up quicker because you are amortizing your loan over a shorter period.

Drawbacks: You will have higher monthly payments.
Note: This loan is a good option for people who can manage the higher payments and want the shorter pay-off time.

Adjustable Rate Mortgages (ARMS)

An Adjustable Rate Mortgage, or an ARM, gives the borrower the ability to get a mortgage, typically at a lower interest rate, for a specified period of time. Although the loan is amortized over 30 years, the interest rate will adjust after the fixed period disclosed in your ARM.

At this point you can either refinance at a lower interest rate, if available, or make the adjusted payments based on current interest rates and the terms of your ARM.

There are many ARM programs available today. A 6 month ARM for example means that the term of the loan, which is 30 years, will have an adjusting interest rate every six months.

With a 7/1 ARM, the loan has a fixed interest rate for the first seven years at which point the interest rate adjusts annually for the remainder of the loans term, or the next 23. As with every ARM program the borrower may chose to refinance at a lower interest rate if it makes sense to do so.

ARMS are ideal for the borrower who is planning on staying in their home for a short period of time. The lower initial interest rate of an ARM creates a potential savings for the short-term owner who may then refinance at their digression.

6 Month, 1 Year, 3/1, 5/1, 7/1, and 10/1 ARMS
ARMS are fixed rate mortgages for a specified period of time: 6 month, 1 Year, 3, 5, 7 and 10 years respectively. Typically the borrower pays a lower interest rate, which will then adjust for the remaining term of the loan as disclosed in the ARM. The borrower will then have the option of refinancing or continuing to pay the adjusted interest rate.

Loan Type: Adjustable Rate Mortgage (ARM).

Definition: The interest rate changes over time as described by your ARM disclosure on a basis set by a clause in your ARM.

Benefits: You will have a lower interest rate in the beginning of your mortgage repayment process, however your interest rate will change over time.

Drawbacks: Payments may increase and this can be difficult if rates increase.
Note: This is a good option if you know your income will increase, rates are expected to drop, or you are expecting to have the home for only 5 years or so.