Mortgages fall under two basic types: fixed rate and variable rate. Fixed-rate mortgages come with a fixed rate of interest that does not change over the life of the loan, notes Bankrate while variable-rate mortgages, popularly known as adjustable-rate mortgages or ARMs, come with a rate of interest that may change or be adjusted in time. Both mortgage types have benefits and drawbacks.
Fixed-rate mortgages offer the advantage of predictability since the homebuyer knows in advance how much interest the lender will charge on the purchase, notes Bankrate. This translates to monthly payments that remain static throughout the life of the loan. A disadvantage that comes with fixed-rate mortgages is that ARMs are generally offered at lower interest rates, at least initially.
ARMs usually start out with a very competitive interest rate for the first few years of the loan, reports Investopedia. However, the rate is adjusted during the course of the loan, making the monthly payments on the loan higher. The rate first applied to the loan is the introductory rate. When the period of validity for the introductory rate ends, the prevailing market rates determine how much interest is charged. Variable rate mortgages are recommended for homeowners who don't plan to stay in their homes long term since the lower rate allows for lower payments.