With a fixed-rate mortgage, your principal and interest payment stays the same for as long as you have your loan.

  • Consider a fixed-rate mortgage if you want a predictable payment.
  • You may be able to refinance later if interest rates fall or your credit or financial situation improves.

With an adjustable-rate mortgage (ARM), your payment often starts out lower than with a fixed-rate loan, but your rate and payment could increase quickly. It is important to understand the trade-offs if you decide on an ARM.

  • Your payment could increase a lot, often by hundreds of dollars a month.
  • Make sure you are confident you know what your maximum payment could be and that you can afford it.

Planning to sell your home within a short period of time? That’s one reason some people consider an ARM. But, you probably shouldn’t count on being able to sell or refinance. Your financial situation could change. Home values may go down or interest rates may go up. You can learn more about ARMs in the Consumer Handbook on Adjustable Rate Mortgages or by visiting the Consumer Financial Protection Bureau.

Check for risky loan features

Some loans are safer and more predictable than others. It is a good idea to make sure you are comfortable with the risks you are taking on when you buy your home.

A balloon payment is a large payment you must make, usually at the end of your loan repayment period. Depending on the terms of your loan, the balloon payment could be as large as the entire balance on your mortgage.

A prepayment penalty is an amount you have to pay if you refinance or pay off your loan early. A prepayment penalty may apply even if you sell your home.

Published from Your home loan toolkit – A step-by-step guide by Consumer Financial Protection Bureau