What is the difference between a fixed-rate mortgage and an adjustable-rate mortgage?
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Short answer
A has an that is set when you take out the loan and does not change. An can go up or down after an introductory period. Neither type is described here as better; the difference is whether the rate can change.
Full explanation
The core distinction is rate stability. With a fixed-rate mortgage, the interest rate is set at origination and will not change. With an adjustable-rate mortgage, the rate may go up or down.
Many ARMs start with a lower rate than available fixed-rate loans. That introductory rate may last months or several years. After it ends, the rate changes on a set schedule, and the payment is likely to rise. The new rate is tied to an index plus a margin, subject to any caps on how high or low the rate can move. When the index falls, the payment may fall, but that is not true for all ARMs. Caps for the first change can differ from later changes.
The CFPB warns against assuming you can sell or refinance before the rate changes. Property value or your finances may not support that plan. Before taking an ARM, find out how high and low the rate and payment can go, how often the rate adjusts, how soon the payment could rise, whether there are caps, and whether you could afford the maximum payment allowed by the contract.
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What is the difference between a fixed-rate and adjustable-rate mortgage (ARM) loan?
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