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What is the difference between a fixed-rate loan and an adjustable-rate loan?
Fixed Rate Mortgage:
It is also known as FRM. It is a mortgage loan in which the interest rate and the payment of principal and interest do not change
during the entire term of the loan, for the original borrower . The most common mortgage terms are 15 and 30 years. It is an
extremely stable choice. It protects the borrower from rising interest rates . It makes budgeting for the future very easy.
Adjustable Rate Mortgage:
An adjustable rate mortgage is also known as ARM. It is a mortgage in which the lender is allowed to adjust the interest rate during
the term of the loan, according to the pre-selected index. The interest rates are adjusted to coincide closely with the current rates.
A margin and an index determine the change which is based on the market conditions at the time of the change. They were created in
early 1980’s, to provide affordable mortgage financing in a changing economic environment. If a person applies for an adjustable rate
mortgage, an ARM Program Disclosure is provided by the lender which informs about the terms of the loan. One and three year ARM is
offered by the GSCU.
FRMs
are beneficial to those who
a. are on a fixed income and
b. prefer fixed payment schedules.
ARMs
are beneficial for those who
a. do not plan to stay in their home for a long time,
b. do not qualify at higher fixed interest rates and
c. can financially handle fluctuating payments.
If the interest rate drops, and a person wants to take advantage of a lower rate, he/she may not have to refinance as he/she would
with a fixed rate mortgage.
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