A fixed rate mortgage has an interest rate that is locked throughout the life of the loan.
An adjustable rate mortgage has a rate that can either increase or decrease throughout the life of the loan.
There is also a product called the Option ARM that was very popular for some time, but , has decreased in popularity due to negative press and overuse and abuse by the mortgage industry.
An option ARM has 4 types of payment options: 30 year fixed payment, 15 year fixed payment, interest only payment, and a minimum payment.
Consumers must be aware of the consequences when not properly using Option ARM or “NegAm” loans. Once a loan reaches a certain level of negative amortization, commonly 120%, the interest rate commonly resets putting the consumer in danger.
Interest only features are also palatable options on fixed rate products. Such products offer the option of a full payment or an interest only payment for a certain number of years.
To add a bit to the other answer: let’s talk briefly about some loans that share some fixed and adjustable characteristics.
One of the most popular ARMs is the 5/1 (five one). You will see other variants such as a 5/6, 7/1, 10/1, 3/27, etc…
In a nutshell, you will be a looking at one number followed by the slash and another number. In almost all cases, the first number is the number of years for which the interest rate is fixed. A 5/1 for instance, is fixed for five years.
The second number can be months or years, and either refers to the amount of time that will pass between rate adjustments or the remaining number of years in the loan after the initial fixed period. For example, a 5/1 would adjust every year after the 5th year, a 5/6 would adjust every 6 months, and a 3/27 would adjust every year after the third, for 27 years.
This is important to know because some mortgage brokers will advertise these types of ARMs as having a “fixed rate.” I’ve even heard some unscrupulous advertisers refer to these products in the following manner: “This is a 30 year loan with a low fixed rate.”
Well, I suppose if you want to examine these words literally, it is indeed a 30 year loan. And the interest rate is fixed, even if only for the first few years. The point is: buyer beware. Make sure you know what you’re getting, and don’t fall for unscrupulous advertising.
These ARMS certainly have their place for many customers, especially those who know that they will only be in a home for about 5 years. In those cases, a 5 year fixed ARM can have a much lower rate and payment than a full 30 year fixed.