With a fixed-rate loan, your interest rate won't change and your payment will stay the same month to month. Fixed-rate loans allow you to plan exactly how much you'll pay each month throughout the life of your loan.
With an adjustable-rate loan (also referred to as an adjustable-rate mortgage or ARM), your interest rate is fixed for the first 5, 7, or 10 years (depending on your term). After this initial period, your interest rate may adjust every 6 months based on current market rates after that. You'd possibly have a lower interest rate and Annual Percentage Rate (APR) for the initial period of an adjustable-rate loan than you would with a fixed rate loan.
Historically, homebuyers have chosen an adjustable rate when interest rates were high. The initial lower rates of an ARM – resulting in smaller monthly mortgage payments – made homeownership more attainable.
While you can plan for the fixed period of your ARM, your payments could increase (or decrease) once you reach the adjustable period of the loan. It’s important to know if you’ll be prepared for a higher monthly payment.