When you obtain a mortgage, you have to pay interest. Lenders often use the Annual Percentage Rate (APR) to express how much the interest is. The APR is the interest rate for one whole year. The higher the interest rate/APR, the more the you have to pay. The total interest that has to be paid during the mortgage loan term can easily exceed the loan amount itself. For example, when you have a amortized mortgage that consists of a loan amount of $250,000, an annual interest rate (APR) of 6% and a loan term of 30 years, the total interest you must pay be will be $289,595. The total costs will be $250,000 + $289,595 = $539,595. In the end you paid more than twice as much for your house in this example! You can do such calculations by yourself with the mortgage payment calculator on this site. Interest rates for mortgages can be either fixed or variable/adjustable, which is explained below.
Fixed Rate Mortgage (FRM)
In a Fixed Rate Mortgage, the interest rate does not fluctuate during the loan term. The interest rate will be determined when you apply for the mortgage. Therefore, the benefit of a Fixed Rate Mortgage is that you exactly know you must pay for each installment during the mortgage. However, interest rates are generally higher than for Adjustable Rate Mortgages.
Adjustable Rate Mortgage (ARM)
In an Adjustable Rate Mortgage, the interest rate fluctuates during the loan term, because it is based on a credit market interest index that also fluctuates over time. The advantage of a variable interest rate is that if the market interest rate declines, your monthly interest payments also decline. Furthermore, the interest rate is generally lower than for Fixed Rate Mortgages. However, if the credit market interest index increases, the mortgage interest payments will also increase. This increases the risk of defaulting.
Adjustable Rate Mortgages are offered in different forms. For example, there is a 10/1 Adjustable Rate Mortgage, in which the initial interest rate is fixed for the first ten years of the mortgage. After ten years, the interest rate will change each year. There is also a 3/3 Adjustable Rate Mortgage, in which the interest rate is adjusted every three years.