🏠 Real Estate · Lesson 8 of 8 · 90 sec
Mortgages 101: Fixed vs Adjustable
🏠 Two neighbors buy identical houses in 2005. One takes a fixed rate that's a bit higher; the other takes the adjustable rate because the first few years are cheaper. Three years later, one payment hasn't moved and the other has jumped by hundreds a month. Biggest loan of your life, and the whole difference is one checkbox.
💡 Key idea
Fixed-rate = same principal-and-interest payment for the whole loan (safe and predictable). ARM = lower at first but can climb later. Most people should default to fixed.
🧠 Why it matters
A fixed-rate mortgage locks your interest rate for the whole loan — your principal-and-interest payment never changes (your total bill can still rise with property taxes and insurance), which is predictable and safe. An adjustable-rate mortgage (ARM) starts lower but can rise after a few years when rates reset, so your payment can jump. Fixed is usually the safer default; an ARM only makes sense if you are confident you will move or refinance before it adjusts.
🌍 In the real world
📉 In the mid-2000s, thousands of buyers took ARMs because the starter payment looked affordable. When the rates reset higher, payments jumped hundreds of dollars a month, many could not keep up, and it fueled a wave of foreclosures. The neighbors who chose a slightly higher fixed rate barely noticed — their payment never moved.
📌 Takeaways
- Fixed-rate locks your payment for the life of the loan
- ARMs start lower but can rise sharply when they reset
- Default to fixed unless you are sure you will leave before the adjustment
📖 Terms in this lesson
Amortization: Paying a loan off in equal installments, where early payments are mostly interest and later ones mostly principal.
Mortgage: A long loan to buy a home, with the home as collateral.
Fixed rate: An interest rate that stays the same for the whole loan, so the payment never changes.
Adjustable rate (ARM): An interest rate that can change after an initial period, so payments can rise.
Down payment: The part of a big purchase you pay up front; the rest is the loan.
✅ Test yourself
What defines a fixed-rate mortgage?
- The rate changes yearly
- The interest rate and payment stay the same for the whole loan
- It has no interest
- It is interest-only
Answer: B · The interest rate and payment stay the same for the whole loan
Fixed means locked — your rate and principal-and-interest payment never change, which is predictable and safe.
What is the main risk of an adjustable-rate mortgage?
- It is illegal
- The payment can jump sharply when the rate resets
- It always costs more upfront
- It cannot be refinanced
Answer: B · The payment can jump sharply when the rate resets
ARMs start cheap but can climb when they adjust — dangerous if you have not moved or refinanced first.
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