What is the difference between a fixed-rate mortgage and an adjustable-rate mortgage?

A fixed-rate mortgage is characterized by a constant interest rate throughout the entire term of the loan. This means that the borrower's monthly payments for principal and interest remain the same, providing stability and predictability in budgeting. This predictability can be particularly advantageous in a fluctuating interest rate environment, as borrowers are protected from potential increases in interest rates over time.

In contrast, an adjustable-rate mortgage (ARM) typically starts with a lower interest rate that may change periodically based on market conditions. This means that monthly payments can fluctuate, which can lead to uncertainty in budgeting and potential increases in payment amounts, creating a different risk profile compared to a fixed-rate mortgage.

Understanding this distinction is crucial for borrowers when choosing a mortgage type, as it directly affects their financial planning and risk tolerance. A fixed-rate mortgage offers long-term stability, making it an appealing choice for many homeowners.