Adjustable vs. Fixed Rate Mortgages

If you are planning to purchase your first home, it will be helpful to understand two common home financing options: fixed rate mortgages and adjustable rate mortgages (ARMs). A fixed rate mortgage offers a borrower a set interest rate that will not vary for the life of the loan. In contrast, an adjustable rate mortgage, also called a variable rate mortgage, is a loan in which the interest rate is adjusted periodically, based on a measure or an index, such as the rate on U.S. Treasury bills or the average national mortgage rate. In exchange for assuming some of the risk of an increase in interest rates, a borrower often receives a lower initial rate with an ARM than with a fixed rate mortgage.

Deciding which option is right for you depends on a number of factors, including current interest rates, the length of time you expect to own your home, and tax considerations from the home mortgage interest deduction.


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