With nearly two decades in journalism, Dori Zinn has covered loans and other personal finance topics for the better part of her career. She loves helping people learn about money, whether that’s preparing for retirement, saving for college, crafting.
Dori Zinn Loans WriterWith nearly two decades in journalism, Dori Zinn has covered loans and other personal finance topics for the better part of her career. She loves helping people learn about money, whether that’s preparing for retirement, saving for college, crafting.
Written By Dori Zinn Loans WriterWith nearly two decades in journalism, Dori Zinn has covered loans and other personal finance topics for the better part of her career. She loves helping people learn about money, whether that’s preparing for retirement, saving for college, crafting.
Dori Zinn Loans WriterWith nearly two decades in journalism, Dori Zinn has covered loans and other personal finance topics for the better part of her career. She loves helping people learn about money, whether that’s preparing for retirement, saving for college, crafting.
Loans Writer Chris Jennings Loans & Mortgages EditorChris Jennings is a writer and editor with more than seven years of experience in the personal finance and mortgage space. He enjoys simplifying complex mortgage topics for first-time homebuyers and homeowners alike. His work has been featured in a n.
Chris Jennings Loans & Mortgages EditorChris Jennings is a writer and editor with more than seven years of experience in the personal finance and mortgage space. He enjoys simplifying complex mortgage topics for first-time homebuyers and homeowners alike. His work has been featured in a n.
Chris Jennings Loans & Mortgages EditorChris Jennings is a writer and editor with more than seven years of experience in the personal finance and mortgage space. He enjoys simplifying complex mortgage topics for first-time homebuyers and homeowners alike. His work has been featured in a n.
Chris Jennings Loans & Mortgages EditorChris Jennings is a writer and editor with more than seven years of experience in the personal finance and mortgage space. He enjoys simplifying complex mortgage topics for first-time homebuyers and homeowners alike. His work has been featured in a n.
| Loans & Mortgages Editor
Published: Nov 30, 2023, 3:00am
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Buying a house is a big deal. The terms, interest rate and the type of loan you choose have a lasting impact on your payments. When shopping for a home loan, you’ll come across two basic types of mortgages: fixed-rate mortgages and adjustable-rate mortgages (ARMs).
With a fixed-rate mortgage, the interest rate you receive at the beginning of the loan stays the same throughout the term. That means you’ll make the same payment every month until you pay off the loan, refinance it or sell the home. This is good news for borrowers who can lock in a low rate as it reduces the overall cost of the loan.
There are two distinct periods to an adjustable-rate mortgage: the fixed period at the beginning of the loan and the adjusted period that follows.
You’ll start with a lower introductory rate for the first few years of your mortgage (the fixed period), and then you’ll enter the adjusted period where the rate can change periodically—usually once or twice a year—depending on your terms.
For example, a 5/1 ARM gives you a fixed interest rate for the first five years of your mortgage. After that, the rate adjusts once a year.
Say you get a $400,000 home and put 20% down ($80,000) with a fixed interest rate of 5% and a 30-year term. Your monthly principal and interest payments would amount to approximately $1,700 and won’t change for the life of the loan. Remember that you’ll also need to factor in taxes and insurance.
If you get a 5/1 ARM with the same figures but a lower initial interest rate—let’s say 3.75%—the first five years of payments would start at just under $1,500 a month. Should market conditions stay about the same, you would spend about $67,000 less in interest than the fixed-rate loan.
While an ARM could save you money in some situations—such as if you plan to move before the introductory period ends—you may wind up paying more than you would with a fixed-rate mortgage if rates increase. It’s common for homeowners to refinance their ARMs into a fixed-rate loan before the adjusted period begins to lock in a rate, especially if rates are trending upward.
The biggest difference between a fixed-rate and adjustable-rate mortgage is that the interest rate never changes for a fixed-rate loan, while the rate on an ARM may change several times throughout the loan term. A few other key differences between the two loan types include:
No matter which type of loan you choose, you’ll encounter some similarities. Both fixed-rate and adjustable-rate mortgages share the following characteristics:
The type of mortgage you get matters. Choosing an ARM or a fixed-rate mortgage can cost you thousands of dollars more or less, depending on the circumstances. To determine the best option for yourself, start by considering what your financial goals are and what you plan to do with the house in the long term.
You might want to get a fixed-rate mortgage if you:
You may want to explore an adjustable-rate mortgage if you:
With so many different types of mortgages on the market, it’s important to explore and compare options. You may want to take a chance with an ARM, for instance, if current mortgage rates are high. ARM rates are typically lower than fixed rates, so you can often get a better deal during the first few years of the loan.
Another reason to consider an ARM is if mortgage rates are trending downward or you plan to sell the home within a few years. But if you’re on a strict budget and can’t afford potential fluctuations, a fixed interest rate may work better for you. Fixed-rate mortgages are also a simpler option to understand and budget for, which can be helpful for first-time home buyers.
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Loans WriterWith nearly two decades in journalism, Dori Zinn has covered loans and other personal finance topics for the better part of her career. She loves helping people learn about money, whether that’s preparing for retirement, saving for college, crafting a budget or starting to invest. Her work has been featured in the New York Times, Wall Street Journal, CNN, Yahoo, TIME, AP, CNET, New York Post and more.
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