The monthly payment for principal and interest remains the same during the entire loan period. However, the buyer can save tens of thousands of dollars on interest charges by using the 15-year mortgage. With a fixed-rate mortgage, the interest rate stays the same during the life of the loan. But with an ARM, the interest rate changes periodically, usually in relation to a specific index such as the national average mortgage rate or the Treasury Bill rate. Payments may go up or down accordingly.
Lenders generally charge lower initial interest rates for ARMs than for fixed-rate mortgages.
This makes the ARM easier on your pocketbook at first than a fixed-rate mortgage for the same amount. It also means that you might qualify for a larger loan because lenders sometimes make this decision on the basis of your current income and the first year's payments. Against these advantages, you have to weigh the risk that an increase in interest rates would lead to higher monthly payments in the future. Try to obtain a table showing movements in the index over the previous 10 years to see how your mortgage payments could change. The longer the adjustment period, the better you will be able to plan your future household expenses.