If you have a Fixed-Rate Mortgage, the total interest and monthly payments are set at closing. You repay the principal and interest in equal, usually monthly, installments over a 15-, 20-, or 30-year time period.
Under most circumstances, you can choose to pay off your mortgage more quickly, which means you'll owe less interest over time. |
Your payment stays the same throughout the life of the loan |
An ARM has a variable interest rate that changes on a regular schedule—usually once a year—to reflect market fluctuations. Unlike Fixed-Rate Mortgages, the total cost can't be figured in advance, and monthly payments may rise or fall over the term of the loan.
However, most ARMs have caps, or limits, on the amount the interest rate can change. An annual cap limits the rate change each year (usually to two percentage points) while a lifetime caps limits the change over the life of the loan (usually to five or six points). |
Monthly payments rise and fall depending on the current market rate |
This type of loan is a great idea for those who receive big bonuses once or twice a year. "Interest Only" loans mean lower monthly payments for a fixed period of time because you pay only the interest on your mortgage.
Most people then choose to make big payments on the principal when bonus checks and commissions are received. |
Pay low monthly
payments at the
beginning
of the loan |
