Function

• The basic difference between fixed-rate mortgages (FRM) and adjustable-rate mortgages (ARM) is that the interest rates of FRMs stay the same for the life of the mortgage, while the rates of ARMs can change over time based on changes in the economy's overall interest rates. Interest is the cost of borrowing money, usually expressed as an annualized percentage. For instance, if you have a $100,000 mortgage with a 5 percent interest rate, you would owe $5,000 a year in interest.
  
  

Benefits

• FRMs and ARMs have several potential benefits. FRMs allow borrowers to lock in at a given interest rate so they don't have to worry about their rate changing over time. This can be especially beneficial if interest rates increase over time. ARMs often feature lower initial interest rates than FRMs, and the rates charged could go down over time without a refinancing if the economy's interest rates fall.
  
  

Drawbacks

• The main drawback of FRMs is that borrowers may have to refinance a mortgage to take full advantage of falling interest rates, and refinancing can be an expensive process. The drawback of ARMs is that interest rates can increase over time; after initial periods of low interest, rates often jump above those charged by FRMs.
  
  

Potential

• Mortgage refinancing is a process where a lender pays off your mortgage in exchange for a new loan with different terms. Refinancing offers the potential to switch from an ARM to an FRM or vice versa, and you may also alter the interest rate, loan duration and other terms of the mortgage. Typically, homeowners stand to benefit most from refinancing to FRMs after a period of falling interest rates.
  
  

Considerations

• FRMs are considered more conservative and safer than ARMs. ARMs can be attractive for low initial interest rates, but since rates can change, ARMs can make it difficult to project the total cost of a mortgage.