What is a key distinction between a "fixed-rate mortgage" and an "adjustable-rate mortgage"?

The distinction between a fixed-rate mortgage and an adjustable-rate mortgage centers around the stability and variability of the interest rates associated with each. A fixed-rate mortgage provides the borrower with an interest rate that remains constant throughout the life of the loan. This means that the monthly payments remain predictable and stable, allowing borrowers to budget more effectively over time without concern for fluctuations in interest rates.

On the other hand, an adjustable-rate mortgage (ARM) features interest rates that can change at specified intervals, usually in relation to a specific index. Because of this fluctuating nature, the monthly payments can increase or decrease, depending on the current market conditions and the terms defined in the mortgage agreement. This variability can make budgeting more challenging for borrowers.

Understanding this key distinction is crucial for potential homebuyers and investors because it directly impacts long-term financial planning and mortgage affordability. Borrowers may choose a fixed-rate mortgage for the stability it provides or an ARM for potentially lower initial rates, with the understanding that their payments might change in the future.