What Is the Difference Between Fixed-Rate and Adjustable-Rate Mortgages?
Choosing between a fixed-rate and adjustable-rate mortgage is an important part of deciding how you want your mortgage to work over time. The biggest difference is how the interest rate is structured and whether it can change after you take out the loan.
When I sit down with a homebuyer to discuss mortgage options, I look at more than the initial interest rate. I also consider how long they expect to own the home, what type of monthly payment fits their budget, and how the loan structure fits into their overall financial goals.
I'm Phillip Cresta, and I've been in the mortgage industry and with Residential Home Mortgage Corporation for over 16 years. I help homebuyers evaluate their mortgage options and determine which financing approach may fit their individual situation. I take a hands-on approach and provide sound advice and support from our first conversation through closing and beyond.
A fixed-rate mortgage keeps the interest rate the same for the life of the loan, while an adjustable-rate mortgage, or ARM, can change after an initial fixed period. Understanding that difference can help you compare the payment, rate structure, and potential future changes associated with each option.
Before choosing between the two, I recommend looking at the complete picture, including the loan terms, monthly payment, how long you plan to keep the home, and how comfortable you are with potential changes to the interest rate.
Table of Contents
What Is a Fixed-Rate Mortgage?
A fixed-rate mortgage is a home loan where the interest rate is set when you take out the mortgage and remains the same for the life of the loan.
One of the main benefits of a fixed-rate mortgage is predictability.
The principal-and-interest portion of your monthly mortgage payment generally remains the same throughout the loan term. Your total monthly payment could still change if other costs, such as property taxes, homeowners insurance, or mortgage insurance, change.
Fixed-rate mortgages are commonly available with different loan terms, including:
15-year mortgages
20-year mortgages
30-year mortgages
When I discuss a fixed-rate mortgage with a homebuyer, I look at both the monthly payment and the long-term cost of the loan.
The goal is to find a loan term and payment structure that fit the borrower's budget and financial goals.
What Is an Adjustable-Rate Mortgage?
An adjustable-rate mortgage, commonly called an ARM, is a mortgage where the interest rate can change after an initial fixed period.
Many ARMs begin with an introductory period during which the interest rate remains fixed. After that period, the rate can adjust at regular intervals according to the terms of the loan.
For example, a 5/1 ARM generally means the initial interest rate is fixed for five years, followed by adjustments that typically occur once each year. The specific terms of the loan should always be reviewed before choosing an ARM.
An ARM's future interest rate is generally determined using an index and a margin, subject to any applicable rate caps.
This means the initial rate is only one part of the mortgage that I want my clients to understand.
Before choosing an ARM, I recommend looking at how often the rate can adjust, how much it can change, and what the maximum potential rate could be under the loan terms.
What Is the Difference Between Fixed-Rate and Adjustable-Rate Mortgages?
The primary difference is whether the mortgage interest rate can change after you take out the loan.
With a fixed-rate mortgage:
The interest rate remains the same.
The principal-and-interest payment generally remains consistent.
You have greater predictability when budgeting for your mortgage.
With an adjustable-rate mortgage:
The initial interest rate is fixed for a specified period.
The rate can adjust after that period.
The monthly principal-and-interest payment can increase or decrease as the rate changes.
The Consumer Financial Protection Bureau explains that an ARM's rate may change based on an index and that the loan's terms can include limits on how much the rate can change.
When I compare these options with a client, I don't look only at the starting rate. I want to understand the entire loan structure and how it fits with the client's plans.
How Does an Adjustable-Rate Mortgage Change Over Time?
An ARM typically has an initial period when the interest rate remains fixed. Once that period ends, the interest rate can adjust according to the terms of the mortgage.
Several components determine how an ARM can change.
These may include:
The initial fixed-rate period
The adjustment frequency
The index
The margin
The initial adjustment cap
The subsequent adjustment cap
The lifetime adjustment cap
For example, the index reflects a broader measure of interest rates, while the margin is a percentage set by the lender. The index and margin are used to determine the fully indexed rate, subject to the loan's applicable caps.
Rate caps can limit how much the interest rate can increase or decrease at an adjustment and over the life of the loan.
This is why I recommend that borrowers considering an ARM look beyond the introductory rate.
You should understand not only what your payment may be at the beginning, but also what could happen if the rate adjusts in the future.
What Are the Advantages of a Fixed-Rate Mortgage?
One of the biggest characteristics of a fixed-rate mortgage is the stability it provides.
Because the interest rate remains the same, homeowners can generally plan around a consistent principal-and-interest payment over the life of the mortgage.
A fixed-rate mortgage may appeal to borrowers who:
Prefer predictable mortgage payments
Plan to stay in their home for many years
Want protection from future changes in market interest rates
Prefer a straightforward mortgage structure
Want greater certainty when planning their long-term housing costs
When I discuss a fixed-rate mortgage with a client, I also consider the loan term.
A 15-year mortgage, for example, will generally have a higher monthly principal-and-interest payment than a 30-year mortgage, but the loan is paid off sooner.
The right term depends on the borrower's budget and financial goals.
What Are the Advantages of an Adjustable-Rate Mortgage?
An adjustable-rate mortgage has a different structure and may offer a lower initial interest rate than some fixed-rate mortgage options.
For some borrowers, the initial payment associated with an ARM may be an important consideration.
However, I always remind clients that the initial payment is only part of the story.
An ARM may be worth considering for someone who:
Expects to own the home for a shorter period
Understands the loan's adjustment terms
Has a financial plan that accounts for potential payment changes
Wants to compare an initial ARM rate with available fixed-rate options
Is comfortable reviewing the loan's rate caps and other terms
An ARM can provide flexibility for certain borrowers, but I want my clients to understand what could happen if they keep the mortgage after the initial fixed period ends.
What Should You Consider Before Choosing a Mortgage Type?
There isn't one mortgage structure that is right for every borrower.
Before choosing between a fixed-rate mortgage and an ARM, I look at several factors, including:
Your expected time in the home
Your monthly budget
The initial interest rate
The initial monthly payment
The loan term
The length of the ARM's initial fixed period
How often the ARM can adjust
The ARM's rate caps
Your long-term financial goals
I also recommend considering what could happen if your plans change.
For example, you may expect to move within a few years, but you cannot always know exactly when you will sell your home. I don't recommend assuming that you will automatically be able to sell or refinance before an ARM adjusts. Your future circumstances, property value, or ability to qualify for a new loan could be different than expected.
The more you understand about the loan before closing, the easier it is to make an informed decision.
How Do You Compare a Fixed-Rate Mortgage With an ARM?
One of the best ways I compare these mortgage options is by looking at the complete loan structure rather than focusing on one number.
I compare the interest rate, monthly payment, loan term, initial ARM period, adjustment frequency, rate caps, closing costs, and overall financial goals.
For a fixed-rate mortgage, I want the borrower to understand the payment and long-term cost associated with the loan term.
For an ARM, I also want the borrower to understand how the interest rate could change and what the payment could look like after the initial fixed period.
The CFPB recommends understanding how high or low an ARM's interest rate and monthly payment can go, how frequently the rate adjusts, and whether the borrower could afford the maximum potential payment allowed under the loan terms.
The RHMC Mortgage Calculator can also help you estimate different payment and loan scenarios.
When Might a Fixed-Rate Mortgage Make Sense?
A fixed-rate mortgage may be worth considering when payment predictability and long-term stability are important to you.
When I review a fixed-rate mortgage with a homebuyer, I look at situations where:
You expect to stay in the home for many years.
You prefer a consistent interest rate.
You want to reduce uncertainty around future mortgage payments.
You want a mortgage structure that is easier to plan around long term.
The monthly payment fits comfortably within your budget.
There isn't a specific amount of time that automatically makes a fixed-rate mortgage the right choice.
I look at the complete picture, including the borrower's plans, budget, loan terms, and financial goals.
When Might an Adjustable-Rate Mortgage Make Sense?
An adjustable-rate mortgage may be worth considering when the loan's structure fits your plans and you understand the potential for future rate and payment changes.
For example, a borrower who expects to own a property for a shorter period may want to compare an ARM's initial terms with those of a fixed-rate mortgage.
However, I don't recommend assuming that you will definitely sell or refinance before the ARM begins adjusting.
Instead, I want borrowers to understand what the mortgage could look like if they keep it longer than originally planned.
If you're considering an ARM, I recommend asking:
When can the interest rate first change?
How often can it change after that?
What index is used?
What is the margin?
What are the rate caps?
What is the highest possible interest rate?
What could the monthly payment be at the maximum rate?
Understanding these details can help you compare the ARM with other mortgage options.
Frequently Asked Questions
Is a fixed-rate mortgage better than an adjustable-rate mortgage?
There isn't one mortgage type that is right for every borrower.
A fixed-rate mortgage provides a consistent interest rate, while an adjustable-rate mortgage can change after the initial fixed period.
I recommend comparing the complete loan terms, monthly payment, expected time in the home, and your financial goals before choosing between the two.
Can an adjustable-rate mortgage payment increase?
Yes. After the initial fixed period, an ARM's interest rate can adjust according to the terms of the loan. If the interest rate increases, the principal-and-interest portion of the monthly payment may also increase.
The loan's adjustment caps can limit how much the interest rate can change.
How often can an adjustable-rate mortgage change?
The adjustment schedule depends on the specific ARM.
For example, a 5/1 ARM generally has a five-year initial fixed period followed by annual adjustments. Other ARM structures can have different terms, so I recommend reviewing the specific loan documents before making a decision.
What is an ARM rate cap?
A rate cap limits how much an ARM's interest rate can change.
There can be an initial adjustment cap, a subsequent adjustment cap, and a lifetime adjustment cap. These limits determine how much the interest rate can increase or decrease under the loan terms.
Can I refinance an adjustable-rate mortgage?
In many cases, a homeowner may be able to refinance an ARM into another mortgage if they qualify.
A homeowner may consider refinancing into a fixed-rate mortgage or another loan structure depending on their circumstances.
However, I don't recommend assuming that refinancing will always be available in the future. Changes in property value, finances, credit, income, or lending requirements could affect your ability to qualify.
How do I choose between a fixed-rate and adjustable-rate mortgage?
Start by comparing the complete terms of both loans.
I recommend looking at:
Interest rate
Monthly payment
Loan term
Initial ARM period
Adjustment frequency
Index and margin
Rate caps
Closing costs
How long you expect to own the home
Overall financial goals
Looking at these factors together can give you a clearer understanding of how each mortgage could fit your situation.
Ready to Explore Your Mortgage Options?
If you're trying to decide between a fixed-rate mortgage and an adjustable-rate mortgage, you don't have to compare the options on your own.
I've been helping homeowners navigate mortgage financing for over 16 years. My approach is hands-on, and I believe in providing sound advice and support from our first conversation through closing and beyond.
If you're purchasing a home and aren't sure which mortgage structure may fit your plans, let's look at your options together.
At RHMC, I can help you compare mortgage programs and understand how the interest rate, payment, loan term, and other terms could affect your financing.
Phillip Cresta | NMLS #356108
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