If you’re about to take out a home loan, it’s important to understand the differences between a fixed-rate and adjustable-rate mortgage (ARM). For instance, you might be wondering why most people get fixed-rate mortgages when adjustable-rate mortgages have lower interest rates.

What is an ARM? An ARM is an adjustable-rate mortgage. For the first few years, your interest rate will remain fixed before adjusting periodically after that. Since your rate adjusts periodically following the initial fixed period, your monthly mortgage payment may change as well.

How ARM rates work? ARM rates are determined by an interest rate index set by the market plus a margin set by the lender. For instance, if your margin is 2 percentage points and the index rate is 0.15%, then your interest rate would be 2.15%.

What is a fixed-rate mortgage? A fixed-rate mortgage has the same interest rate for the entire loan term. That’s the biggest difference between fixed and adjustable-rate mortgages. The most common type of mortgage is the 30-year fixed. The second-most common is the 15-year fixed. Some lenders let you customize the term to, say, 19 years or 24 years.

The difference between ARMs and fixed-rate mortgages – The basic requirements to qualify for a mortgage are similar between ARMs and fixed-rate loans. The main differences between the two are their cost and risk.

Want to know more? Ask your Bison Ventures team member to discuss your options and see what’s right for you.