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Fixed-Rate Mortgages
The interest rate is set for the full term of the loan. Because the monthly payment for principal and interest remain constant for the life of the loan, it's easier to plan a budget.
Adjustable Rate Mortgages
An adjustable-rate mortgage (ARM) has an interest rate that is fixed up to 10 years and then adjusts periodically based on financial market conditions.
Loan Terms
The "term" of a loan is the length of time over which you agree to repay the loan. Determining whether a longer-term loan or a shorter-term loan is better depends on a number of factors, most notably monthly income and long-term financial goals.
Comparing two fixed-rate loans with different terms:
- The longer-term loan offers lower monthly payments. This may be a good option if on a tight budget or it's preferable to direct monthly cash flow toward other investments or expenses.
- The shorter-term loan result in higher monthly payments, but repaying the loan faster thus saving money on interest paid.
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