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Fixed Rate vs. Adjustable Rate Mortgage: A Homebuyer’s Guide
Key takeaways
- Fixed-rate mortgages keep the same interest rate for the loan term, making principal-and-interest payments predictable and insulating you from rising rates
- ARMs usually start with a lower introductory rate for several years, then adjust on a recurring basis, so payments can change
- The best choice depends on how long you’ll keep the home and your risk tolerance
Two of the most common options for financing home purchases are fixed-rate mortgages and adjustable-rate mortgages (ARMs). To understand the difference between them, it helps to look at how each loan handles interest rates, monthly payments, and long-term costs. Then, you can compare fixed and adjustable mortgages and choose what fits your timeline and risk tolerance.
What is a fixed-rate mortgage?
A fixed-rate mortgage is a home loan with an interest rate that stays the same for the life of the loan. Once you lock in your rate at closing, it remains unchanged unless you refinance or modify the loan. This means your monthly principal-and-interest payment stays constant, even if market interest rates rise significantly. This is why it's a common choice for homeowners who favor predictability.
Fixed-rate loans are commonly available in long and short terms, including a 30-year fixed-rate mortgage (most common) and a 15-year fixed-rate mortgage (often higher monthly payments, but less total interest).
Key characteristics of fixed-rate mortgages
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The rate never changes. Once you lock in your interest rate, it remains constant throughout the entire loan term
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Monthly payments remain consistent (P&I). Your principal and interest payment stays the same each month. However, your total housing payment might fluctuate due to homeowners insurance, property taxes, or PMI (private mortgage insurance)
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No surprises due to market rate fluctuations. Rising market rates won’t affect your mortgage rate or payment
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Ideal for long-term homeowners. Borrowers who plan to stay in their home for many years often benefit most from this stability
What is an adjustable-rate mortgage?
An adjustable-rate mortgage (ARM) is a home loan with an interest rate that changes over time. ARMs typically start with a fixed introductory period—often 5, 7, or 10 years—followed by periodic adjustments based on market conditions and a specific index.
ARMs also have standard repayment terms, commonly 15 or 30 years, so the principal is amortized over a fixed length of time, regardless of rate type or rate adjustments.
An ARM can enable a homebuyer to purchase a more expensive home because the introductory rates generally are lower than the rates on fixed-rate mortgages. When the introductory period ends, the homeowner's income may have increased to accommodate a possibly higher mortgage payment. Other possibilities are that interest rates might be the same or lower, the homeowner could be ready to move again, or the homeowner could refinance.
The structure of an ARM is often described using two numbers. For example, in a 5/6 ARM:
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The first number—5—indicates the fixed-rate period: 5 years
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The second number—6—shows adjustment frequency and reset dates. In this case, every 6 months after the intro period ends
Similarly, a 7/6 ARM would have a fixed rate for 7 years, then adjust every 6 months thereafter.
Introductory rate vs. fully indexed rate (ARM)
When the introductory period ends, how does the lender decide what the new, adjusted rate will be?
That rate, called the fully indexed rate, is made up of two components—the index rate and the margin rate. The lender typically bases the index rate on a market benchmark rate like the prime rate or the Secured Overnight Financing Rate (SOFR). The lender then adds a margin, a fixed number of percentage points, to that benchmark rate to determine the fully indexed rate.
Key characteristics of ARMs
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Lower initial interest rates. ARMs often start lower than comparable fixed-rate loans, reducing early payments
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Payments may rise or fall later. After the introductory fixed-rate period ends, your payment can change as the rate adjusts. The rate may be adjusted at regular intervals, such as every 12 months or every 6 months
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ARM rate caps help limit increases. ARMs typically include caps that restrict how much your rate can change per adjustment and over the life of the loan
Fixed-rate vs. adjustable-rate mortgage: Main differences
Understanding the key distinctions can help you decide between an arm vs. fixed rate loan and choose the structure that aligns with your goals.
1. Interest rate stability
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Fixed-rate mortgage: The interest rate is locked in for the life of the loan
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ARM: The rate starts fixed, then adjusts based on the benchmark index and your cap structure
2. Monthly payment predictability
This is the classic tradeoff: payment stability vs. potential savings.
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Fixed-rate: Predictable principal-and-interest payment over the full term
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ARM: Potentially lower payments upfront, but uncertainty later
3. Initial cost
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Fixed-rate: Often a higher interest rate than the initial rates with an ARM
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ARM: Often lower initial rates, which can lower early monthly payments
4. Long-term cost
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Fixed-rate: More predictable total cost; and you could refinance if rates drop to reduce long-term costs
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ARM: Can be cheaper if rates stay flat or fall, but if rates rise the long-term costs could be higher
5. Ideal borrower
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Fixed-rate: Appeals to buyers seeking long-term predictability
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ARM: May suit buyers who plan to move, sell, or refinance before rate adjustments begin
What are the pros and cons of adjustable-rate mortgages (ARMs)?
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Fixed-rate: Appeals to buyers seeking long-term predictability
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ARM: May suit buyers who plan to move, sell, or refinance before rate adjustments begin
Pros
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Lower initial interest rate
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Lower payments during the fixed intro period
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Potentially cheaper if rates remain stable or fall
Cons
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Rate increases can lead to higher payments after the intro period
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Harder to predict long-term costs
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More complex structure (index, margin, caps, resets)
Which loan is better: Fixed or adjustable?
If you’re asking "what is better: fixed or adjustable rate?" the honest answer is: it depends on your situation, goals, and comfort with risk.
Choose a fixed-rate mortgage if you:
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Want predictable payments
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Expect to stay in the home long-term
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Prefer stability over short-term savings
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Are risk-averse
Choose an ARM if you:
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Plan to move or refinance within 5-10 years
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Want lower initial payments
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Are comfortable with possible rate increases
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Expect interest rates to fall (and understand the ARM’s caps and reset schedule)
Example of a cost comparison
Let's look at a basic example of how the costs can differ between a fixed-rate and an adjustable-rate mortgage.
30-year fixed-rate mortgage
On a $300,000 loan at 6.5%, your monthly principal and interest payment would be approximately $1,896, and you’d pay roughly $382,600 in total interest over 30 years.
5/6 ARM
On a $300,000 loan at 5%, your initial monthly principal and interest payment would be approximately $1,610. Compared to the first five years of the fixed-rate mortgage in the example above, you could save about $286 a month for a total of $17,160. After that, your rate would adjust and there's no way to know in advance what your long-term total interest costs might be.
Fixed-rate mortgage |
Adjustable-rate mortgage (ARM) |
|
|---|---|---|
Interest rate |
Stays the same
|
Fixed at first, then changes
|
Monthly payment (P&I) |
Predictable
|
Can rise or fall after intro period
|
Starting rate |
Typically higher
|
Typically lower
|
Long-term cost |
More predictable
|
Can be lower or higher depending on rate changes
|
Complexity |
Simple
|
More complex (indexes, margins, caps)
|
Best for |
Long-term stability
|
Shorter horizon or flexibility
|
Other factors that can matter in your decision
These factors don’t change whether a fixed rate mortgage vs. ARM is right for you, but they could affect your total costs:
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Rate lock for mortgages. Locking your rate can protect you from market moves between application and closing
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Points and closing costs. Paying discount points may lower your rate, but increases upfront costs
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Conforming vs. jumbo mortgage. Loan size and guidelines can affect rates, underwriting, and the options for ARM and fixed-rate options
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Mortgage amortization schedule. Even with the same rate, a shorter term pays down principal faster and reduces total interest
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First-time homebuyer mortgage considerations. Programs, down payment assistance, or credit requirements can influence which loan structure is realistic
FAQs
The fundamental difference is whether the interest rate stays the same. Fixed-rate loans keep the same rate for the loan term. ARMs start with fixed-rate period and then adjust, which can change your payment.
Yes. In fact, many borrowers go into an ARM planning to refinance into a fixed-rate mortgage if the rate adjustments lead to higher payments.
Just remember that refinancing includes closing costs and the new market conditions could make the interest rates for fixed-rate mortgages unattractive. Also, approval for a new loan will depend on your current credit rating, income, and home equity.
Your rate might increase after the intro period, which can raise your monthly payment. Most ARMs have caps that limit the increases that can occur during any given adjustment and over the life of the loan. When you are shopping for a mortgage, you can ask whether an ARM has these caps and, if so, what they are.
You could have the option of refinancing or moving to a more affordable residence. You might also decide to wait and see if rates will come down.
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