There are primarily two types of home loan interest rates:
- Fixed Interest Rate:
- With a fixed interest rate, the rate remains constant throughout the entire loan term.
- Borrowers have the peace of mind of knowing that their monthly mortgage payments won't change, making budgeting more predictable.
- This type of interest rate is typically slightly higher than initial rates on adjustable-rate mortgages.
- Adjustable or Variable Interest Rate:
- Also known as a variable or floating interest rate, this rate can change over time based on market conditions.
- Initially, adjustable-rate mortgages (ARMs) often offer a lower interest rate than fixed-rate mortgages, making them attractive for borrowers seeking lower initial payments.
- ARMs typically have a fixed period (e.g., 5, 7, or 10 years) during which the interest rate remains constant. After this period, the rate can adjust periodically, typically annually, based on a specific financial index.
- The adjustments are subject to rate caps and limits, protecting borrowers from sudden and significant increases.
Borrowers choosing between these types of home loan interest rates should consider their financial goals, risk tolerance, and how long they plan to stay in the home. Fixed-rate mortgages offer stability and protection from interest rate fluctuations, which can be attractive for long-term homeowners. On the other hand, adjustable-rate mortgages may be suitable for those who plan to move or refinance before the initial fixed period ends, taking advantage of lower initial rates.
