Fixed Rate Loans vs. Adjustable Rate Loans: What's the Difference?

As described above, a fixed rate loan is a loan where the interest rate is set at the beginning of the loan, and never changes over the entire life of the loan. By contrast, an adjustable rate loan is a loan where the interest rate changes (or adjusts) at least once and sometimes several times over the life of the loan. The key benefit to an adjustable rate loan is that the initial interest rate (and therefore the monthly payment) is usually lower with the adjustable rate loan than it is with the fixed rate loan. Additionally, all adjustable rate loans have their interest rate adjustments occur at pre-defined time periods. Common examples include once a year, once every three years, or once every five years. Additionally, some adjustable rate loans are somewhat similar to fixed rate loans. Examples include the 5/25 loan and the 7/23 loan. With either of these two types of loans, the interest rate is fixed for the first time period (i.e. 5 or 7 years) then it adjusts once after the expi ... more