Adjustable-rate mortgages ARMs explained

A fixed-rate mortgage has an interest rate that remains the same for the entire life of the loan, providing predictable monthly payments. An adjustable-rate mortgage (ARM) has an interest rate that can change periodically, usually after an initial fixed period, meaning your monthly payment can go up or down.

While both can have lower initial payments, they are structured differently. An ARM’s interest rate adjusts periodically after an initial fixed period, causing monthly payments to change. A balloon mortgage’s monthly payment is fixed, but the entire loan balance comes due at the end of the term, requiring a refinance or sale.

The main risk is payment shock. If interest rates rise significantly at the time of your rate adjustment, your monthly mortgage payment could increase dramatically. With a fixed-rate mortgage, you are protected from this risk for the life of the loan.

A fixed-rate mortgage provides predictable payments for the entire loan term, making long-term debt planning easier. An adjustable-rate mortgage (ARM) may start with lower payments, but if interest rates rise, your payments and total interest paid can increase significantly, potentially raising your overall debt load unexpectedly.