What it is:
How it works/Example:
A fixed-rate mortgage charges the borrower the same interest rate over the entire life of the loan. The rate on an adjustable-rate mortgage (ARM), also known as a "variable-rate mortgage" or "floating-rate mortgage," fluctuates according to prevailing interest rates.
Why it matters:
Mortgage rates tend to track 10-year Treasury rates. If Treasury rates go up, mortgage rates go up, and vice versa. Mortgage lenders also adjust mortgage rates according to the creditworthiness of the borrower. More risky borrowers are charged higher rates, while more creditworthy borrowers are charged lower rates.