The most common type of mortgage currently issued in the United States is the fixed rate mortgage. It is named that because the interest associated with the loan, also known as the mortgage rate, is fixed throughout the life of the mortgage. It is the most straightforward and simple form of mortgage. Because the rate doesn’t change, a buyer can use a Mortgage Calculator to figure out what they will pay each month for their mortgage — and that amount will not change whether the mortgage lasts for five years or thirty.
The fixed rate mortgage stands in direct contrast to the adjustable rate mortgage. In the latter, the monthly payment is recalculated according to an agreed upon schedule. It uses a formula to calculate the interest based on a major index, such as the Treasury Index. These calculations can occur on an annual, semi-annual, quarterly, or even monthly basis. This results in a mortgage payment that will go up and down over the term of the loan.
Fixed rate mortgages tend to have a much higher interest rate. However, borrowers are willing to pay that higher rate for the security of stable payments. Borrowers who choose an ARM are betting that interest rates will stay in the same neighborhood or go down. They are taking a risk that rates won’t skyrocket resulting in them paying much more for the property over time.