Understand the difference between fixed and adjustable mortgage rates


A couple signing a deed on a home while receiving a house key from the selling agent

Learn how mortgage rates work then use our calculator to see how home loans are paid off. 

When you understand how credit union mortgage rates work you can be more confident in choosing the best mortgage for your financial situation.

Let’s start with the basics. The mortgage rate refers to the rate of interest paid on a home loan. Each month a portion of your mortgage payment is designated for interest. The rest goes to principal (and sometimes escrow).

The rate mortgage lenders charge can change daily. Depending on the market, they may go up or down or remain the same. One key factor is the interest rate set by the United States Federal Reserve. Personal factors that influence mortgage rates are your credit score, home location, home price, loan amount, down payment and loan term.

Rate types and locks
When you get a home mortgage, the terms for interest are set up in one of two ways: fixed or adjustable rate. During the mortgage process, you’ll sign a document that “locks in” your rate for a set number of days, usually 30, but it could be 15 or 60.

During the lock period, your rate will not change. If your mortgage isn’t completed within the lock period, a new rate will be determined based on market prices. However, most mortgages are completed within the lock period.

How fixed rate loans work
With fixed rate loans, your rate remains the same over the life of the loan. you pay down the principal (the price of your home), your interest costs go down. As less money goes toward interest, more goes toward paying off the principal. To see how this works, check out our Payment/Amortization Calculator.

You can choose fixed rate loans with flexible term options to meet your goals. The shorter the loan life, the lower your interest rate and the higher your monthly payment.

How adjustable rate loans work
When you get an adjustable-rate mortgage (ARM), the interest rate changes over the life of the loan. Initially, ARM rates are lower than fixed rates.

For example, a 5-year ARM is structured with a fixed rate for the first five years. After that, the interest rate will be adjusted annually based on current interest rates. Your payment could go up or down. The terms of the ARM cap how high or low the interest could go.

To calculate payments over the life of an ARM, you will need to know its:

  • Maximum periodic rate increase
  • Maximum lifetime rate increase
  • When the initial interest rate changes (in months)
  • How often the rate can change (in months)

When you have these figures, plug them into our Payment/Amortization Calculator to see how principal and interest are paid off over the life of the loan.

Some home buyers choose an ARM when they know they won’t stay in the house long or plan to pay off the house early.

Help in comparing options

Comparing mortgage options doesn’t have to be a do-it-yourself venture. Contact our mortgage loan officers online or call 800.991.2221 and ask for help with home loans. We’ll do everything possible to get you into the home you want.

Consumers helps more than 1,000 members finance land, homes, and home improvement projects each year. When you need a home mortgage loan or home equity line of credit, call us at 800.991.2221. We’re here to help you get the home of your dreams!

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  1. Abigail Gonzalez says:

    I’ve completed the application for home mortgage loan approval but haven’t heard anything back from the application. Please contact me regarding if I was or wasn’t approved. Thank you

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