The Difference Between Fixed-Rate and Adjustable-Rate Mortgages

The Difference Between Fixed-Rate and Adjustable-Rate Mortgages

When it comes to financing your home, choosing the right type of mortgage can make a big difference in your monthly payments and long-term financial stability. Two of the most common loan options are fixed-rate mortgages (FRMs) and adjustable-rate mortgages (ARMs). Understanding how each works will help you decide which is the best fit for your situation.

What Is a Fixed-Rate Mortgage?

A fixed-rate mortgage has an interest rate that stays the same for the entire loan term (commonly 15, 20, or 30 years). That means your principal and interest payments remain predictable month after month.

Best for: Buyers who plan to stay in their home long-term and prefer payment stability.

Pros:

• Predictable monthly payments.

• Easier to budget over time.

• Protection if interest rates rise.

Cons:

• Higher initial interest rate compared to ARMs.

• Less flexibility if you plan to sell or refinance in a few years.

What Is an Adjustable-Rate Mortgage (ARM)?

An ARM starts with a lower interest rate than a fixed-rate mortgage, but the rate adjusts after a set period (commonly 5, 7, or 10 years). After that, the interest rate can rise or fall depending on market conditions.

Best for: Buyers who plan to sell or refinance before the adjustment period ends, or those comfortable with some risk in exchange for lower initial payments.

Pros:

• Lower starting interest rate (and lower initial monthly payments).

• Potential savings if you move or refinance before rates adjust.

• May help you qualify for a larger loan.

Cons:

• Payments can increase significantly after the fixed period.

• Less predictability in long-term budgeting.

• Risk of “payment shock” if rates rise sharply.

Example: Side-by-Side Comparison

• 30-Year Fixed Rate: 6.5% interest → predictable payments of ~$1,896 on a $300,000 loan.

• 5/1 ARM: 5.5% interest for first 5 years → payments of ~$1,703, but subject to change after year 5.

Final Thoughts

The right mortgage depends on your goals and comfort with risk. If you want stability and plan to stay in your home long-term, a fixed-rate mortgage is often the safer choice. If you’re looking for lower initial payments and expect to move or refinance in a few years, an ARM may be a smart option.