With a fixed-rate
mortgage, the interest rate stays the same during the life of
the loan. But with an adjustable rate home loan (ARM), the
interest rate changes periodically, usually in relation to an
index, and your payments may go up or down accordingly.
Also, lenders typically charge lower initial interest rates for
ARMs than for fixed rate mortgages.
This makes the
adjustable rate home loan a bit easier on your pocketbook early
on than a fixed rate mortgage. It also means that you
might qualify for a larger loan because lenders sometimes make
the decision about whether to extend a loan on the basis of your
current income and the first year’s payments. Moreover, your ARM
could be less expensive over a long period than a fixed-rate
mortgage for example, if interest rates remain steady or move
lower. Against these advantages, you have to weigh the risk that
an increase in interest rates would lead to higher monthly
payments in the future. It’s a trade-off—you get a lower rate
with an ARM in exchange for assuming more risk.