The standard mortgage in the US is what is known as a fixed rate. However, more and more people are choosing to get adjustable rate mortgages as an alternative to the usually more costly fixed rate.
Tables of current interest rates for mortgages will prove that most fixed rate mortgages have a higher interest rate than those with adjustable rates (known as ARMs). This is due to the fact that banks are counting on interest rates going up over time. In a fixed rate mortgage, the borrower locks in the interest rate for the life of the loan. This makes it much easier for them to use a Mortgage Calculator With Taxes to determine what their monthly payments will be, as they will not change throughout the life of the mortgage.
In the case of ARMs, the initial interest rate can be as much as two percent lower than that of a fixed rate mortgage. This initial rate is applicable for a set term, such as five or eight years. During that time, the borrower will pay a fixed monthly payment. After that term, the interest rate on the mortgage will be recalculated on a periodic basis according to one of the major market indices (such as the Treasury Index). This means that the monthly mortgage payment will change each time there is a recalculation, which could be every year or even every month.
Some studies suggest that borrowers with ARMs will pay less for the same loan amount over the life of the mortgage. However, there are circumstances where they can end up paying more. There is always a chance that interest rates will rise steadily and evenutally make the initial savings of the ARM meaningless. Borrowers need to carefully consider their financial situation and how much risk they are willing to assume when choosing between a fixed or adjustable rate mortgage.