Before buying a new home or refinancing an existing one, you’ll want to familiarize yourself with the key elements of a loan. One of the biggest considerations in choosing a mortgage is the interest rate charged to the borrower. Called the mortgage rate, it can be fixed or variable.

Here’s what to know about the differences between a fixed-rate mortgage (FRM) and an adjustable-rate mortgage (ARM).

Fixed-Rate Mortgage

With an FRM, the interest rate is set when you take out the loan. Because the rate will stay the same throughout the life of the loan, your payments will never change.

Good in the following situations:

  • You’re able to lock in low interest rates for the term of the loan.
  • You have low tolerance for financial risk.
  • You like having the same monthly mortgage payment.
  • You plan to stay in your home and pay off your loan.

Adjustable-Rate Mortgage

Part of what you’ll pay with an ARM ties to a broader measure of interest rates, called an index. When the index increases or decreases, your adjustable rate—and your payment amount—goes up or down. ARMs usually have a lower interest rate at the beginning of the loan term, and some may even start off with a fixed rate for several years. But once they begin to adjust, rates generally rise higher than those of comparable fixed-rate loans.

Good in the following situations:

  • Rates are on the decline, as your payments will also go down.
  • You plan to sell your home soon.
  • Your income will increase before rates rise.
  • You plan to refinance in the short term.

What should I know about refinancing my mortgage?

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Today’s loan market

For most people, a home is the biggest purchase they’ll make. That’s why it’s important to choose a loan with a mortgage rate suited to your situation. A fixed rate offers more consistency—though often at a slightly higher rate—while a variable rate offers the possibility of lower rates, with the risk of an increase during the variable period of the loan.

As you consider the pros and cons of each loan type, you should talk to several lenders to review your credit score, income, debts, planned down payment and the monthly payment amount you can afford. You’ll also find out which rate you qualify for, and you can review the terms that will make the most sense for you.

Time To Refinance?

Get expert guidance through the process of refinancing by speaking with a home loan professional today.

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