What is the primary difference between a fixed-rate mortgage and an adjustable-rate mortgage?

The primary difference between a fixed-rate mortgage and an adjustable-rate mortgage lies in the interest rate stability over time. In a fixed-rate mortgage, the interest rate remains constant throughout the life of the loan, providing predictable monthly payments and protection against interest rate increases. This stability is particularly beneficial for homeowners who prefer consistency in budgeting and long-term financial planning.

In contrast, an adjustable-rate mortgage (ARM) typically features a lower initial interest rate that can fluctuate after an initial fixed period. When the interest rate adjusts, it can increase or decrease based on prevailing market rates, which can lead to variable monthly payments for the borrower. This introduces a level of uncertainty regarding future payments, making it less predictable than a fixed-rate mortgage.

The other choices relate to aspects not primarily tasked with distinguishing the two types of mortgages. For instance, loan terms and conditions can vary widely within both types of mortgages, while the amount of principal required is generally not a defining characteristic of these mortgage types. Similarly, the type of collateral used (the home itself) remains consistent across both fixed and adjustable-rate mortgages. Therefore, the focus on interest rate stability accurately captures the fundamental difference between these two mortgage structures.