Refinance home loan, reviewing the basics
Because you, not the bank, absorb the risk of rising or falling prime interest rates, banks set the introductory interest for adjustable rate mortgage loans lower than those for fixed rate mortgages. The interest rate on a fixed rate home mortgage does not change over the term of the loan; it is set, or fixed. This protects you from the risk that interest rates will rise, but it also keeps you from getting any benefit if interest rates fall. Banks expect that at some point the prime interest rate will rise higher than your fixed rate mortgage's interest rate and the bank will be forced to pay the shortfall out of its own pocket. To cover for this eventuality, banks set the interest for fixed rate mortgage loans higher than that for adjustable rate mortgages.