It is imperative that your loan officer carefully explain your options in order to tailor the loan program to your specific needs. A fixed rate remains constant throughout the life of the loan, however you pay a higher interest rate for the elimination of any future rate risk. Normally, the shorter the adjustment period, the lower the interest rate. If you are planning to stay in the house for only 2 to 3 years, then an Adjustable Rate mortgage that is fixed for 3 to 5 years may suit you well and save thousands of dollars compared to a 30-year fixed. Usually, when the interest rate changes then your monthly payment will change as well.
ARMs tend to be offered with lower initial rates than fixed-rate loans.
Fixed-rate loans are usually more expensive because you are buying protection from future increases in interest rates. No matter how high rates go, your monthly payment will always be the same. With an ARM, the consumer assumes part of an increase in interest rates, and so may receive a price break on the initial interest rate from the lender. You must consider whether a lower initial rate on the ARM is worth the uncertainty about possible future increases in your monthly mortgage payments. The longer the adjustment period, the better you will be able to plan your future household expenses.